from Follow the Money

China’s future?

September 18, 2006

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Monetary Policy

The Bank of Korea is taking ongoing losses on its reserve holdings.   

South Korea's central bank may have a loss of as much as 3 trillion won ($3.1 billion) in 2006 because of interest costs from [domestic sterilization] bond sales, the opposition Grand National Party said, citing a Bank of Korea report.

``We judge that there is a possibility that the central bank will record a loss between 2.5 trillion won and 3 trillion this year,'' said Lee Jeong, an aide to opposition party lawmaker Yun Kun Young, who sits on parliament's economics and finance committee.

Still, the central bank said interest revenue will be larger in the second half of the year than the first. That revenue should help prevent the loss in 2006 from growing beyond last year's, the bank said in a statement today.

Losing money on your reserves isn’t unusual.  In most emerging economies, domestic interest rates are higher than US and European (let alone Japanese) rates.   Korean policy rates aren’t really all that high – 4.5%.  They just aren’t super low.  

But the reported losses must include valuation losses from won appreciation.

China has avoided these problem.   The RMB hasn’t been allowed to move much (there is a reason no one wants to hedge … the RMB hasn’t been that volatile, and there isn’t much risk it will fall)  Base money is very high – which helps the central banks profits.  And China has intentionally held domestic interest rates well below US rates to discourage speculation.

That helps keep the PBoC profitable.  But it creates other problems.  Like too much bank lending …

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