[Mb-civic] Dollar's Fall Tests Nerve of Asia's Central Bankers

[Michael Butler]

December 4, 2004

Dollar's Fall Tests Nerve of Asia's Central Bankers
 By JAMES BROOKE and KEITH BRADSHER
 

 OKYO, Dec. 3 - As Americans embark on another season of debt-supported
holiday spending, they might want to give thanks that Masatsugu Asakawa is
still buying in America, too.

Mr. Asakawa, 46, is the top official at the Finance Ministry here
responsible for managing the largest portfolio of United States government
securities in the world, worth a staggering $720 billion. As the dollar has
slumped this fall, many investors have started to worry that Mr. Asakawa and
his counterparts elsewhere in Asia will be tempted to pare their holdings,
perhaps causing the currency to plunge much further and setting off a round
of interest rate increases in the United States that could send the global
economy into a tailspin.

But Mr. Asakawa, at least for now, says that he intends to keep right on
adding American holdings to Tokyo's portfolio.

 "We've heard the rumors in the last few days that the Chinese guys, the
Indian guys, the South African guys are diverting from dollars," Mr. Asakawa
said. "We have no plan at all to divert from our dollar-denominated assets."

 Still, Mr. Asakawa admits that he has not been sleeping so well lately.

"This thing wakes me up; it is terrible," Mr. Asakawa said in excellent
American-accented English - he once studied at Princeton - as he toyed with
a blue plastic portable currency monitor. After hours, the wireless device
beeps by his bedside whenever the dollar strays beyond a set range.
"Fortunately," he said, "my wife is very understanding."

Mr. Asakawa has been waking up a lot more often because the long-running
symbiotic relationship between Asia and the United States has started to
fray.

 For years, manufacturers in Japan, China, South Korea and Taiwan have been
selling far more to Americans than Asians have been buying from the United
States. As a result, Asians have accumulated huge quantities of foreign
exchange, which they have used mostly to buy American government securities.

By doing so, they helped keep interest rates in the United States low and
the dollar relatively strong. That allowed Americans to borrow cheaply and
fill their shopping bags with yet another load of well-priced goods imported
from Asia. Low interest rates also enabled Washington to readily finance the
federal government's gaping budget deficit.

But as borrowing by the United States from abroad has soared this year to
$620 billion, a record 5.7 percent of overall economic activity, many
foreigners have become reluctant to keep accumulating dollars at the same
pace. That has left officials like Mr. Asakawa and others at central banks
elsewhere in Asia holding America's purse strings.

Japan's total stockpile of foreign currency, at $817 billion, is still the
largest in the world, but China, which now owns about $600 billion, is
catching up fast.

Among countries that are accumulating dollars - especially China - grumbling
is on the rise that Washington should do more to protect the value of their
investments by cutting the budget deficit and adopting other policies to
slow or reverse the dollar's decline.

"Shouldn't the relevant authorities be doing something about this?" asked
Prime Minister Wen Jiabao of China at a conference in Laos last Sunday.

In Beijing these days, one of the fastest-growing fortunes the world has
ever seen is managed by fewer than two dozen traders, chosen for showing
mathematical brilliance at China's top universities.

Generally lacking any financial experience outside China, they sit at
trading stations around a gold stand bearing a jeweled globe, two feet in
diameter and with seas of lapis lazuli, in a rented room on the fourth floor
of an insurance building.

 Most of the money in China's central bank coffers has accumulated in the
last four years, the product of an investment torrent washing over China and
the ever-expanding flood of goods pouring out of Chinese factories.

As in Japan and China, small groups of civil servants in Taiwan and South
Korea are struggling to invest sizable foreign currency reserves of $235
billion and $193 billion, respectively. For years, all four countries have
held the bulk of their reserves in the Treasury bills, notes, and bonds that
finance the federal budget deficit, leaving American consumers and companies
free to spend more on other things and invest their spare cash in more
promising ventures.

 Together, these Asian institutions are responsible for holding roughly 40
percent of the American government's public debt.

 In contrast to Japan, China's money managers, while selling little of their
existing Treasury holding, have not been buying much more. China's foreign
currency reserves rose by $111.3 billion in the first three quarters of the
year, according to official Chinese data. But its Treasury holdings,
American filings show, climbed by only $16.4 billion.

Instead, officials at the State Administration of Foreign Exchange in
Beijing have been seeking higher yields by plowing billions of dollars a
month into bonds backed by mortgages on houses across the United States,
according to bankers who help Beijing manage the money. By helping keep
mortgage rates from rising, China has come to play an enormous and
little-noticed role in sustaining the American housing boom.

 The proportion of China's hoard in Treasury securities has dropped to about
35 percent, they say, compared with the roughly 90 percent of Japan's
foreign currency reserves still parked in Treasury securities.

Some bankers and economists say that dollar-denominated securities over all
represent a slowly declining share of China's recent purchases. But no
figures are available on how quickly Beijing may be shifting to other
currency holdings, so its effect on the underlying demand for dollars is
unclear.

Still, the American reliance on foreign money and the investment decisions
of bankers halfway around the world underline a serious risk for the
economy: What would happen if this deep investment pool was used to fill
coffers elsewhere in the world, perhaps in Europe or in Asia itself?

 With the dollar trading in recent days around five-year lows against the
Japanese yen, Russia's central bank unnerved currency markets last week by
revealing that it was considering diversifying from dollars to euros.

 A Chinese central banker, Yo Yongding, also caused a brief dive for the
dollar on Nov. 26 by making remarks that were initially translated as a
statement that Chinese dollar holdings were dropping. The banker later
issued a statement that he had noted only that the value of Chinese-held
Treasuries had dropped with the falling value of the dollar.

For all the interest in the other players, currency markets remain focused
on Japan, which has aggressively bought dollars, doubling its investment in
Treasuries over the last two years. During a 15-month period that ended in
March, the Japanese government bought $340 billion of dollar-denominated
securities with its yen. The buying spree so stunned speculators that Japan
has not had to intervene in the markets since.

 But now with Japan's huge stake in the dollar losing value, the question
is, What will Tokyo do next?

The problem for Japan is that it is in so deep that to a large degree it is
chained to its American debtor.

"Imagine that tomorrow people hear, 'Hey, Japan has decided to divert from
U.S. dollars to euros,' " Mr. Asakawa said. "That would create a hugely
undesirable impact on the U.S. Treasury market, and we have no intention at
all to make an unfortunate impact on the U.S. Treasury market."

Any selling move by Japan would move the entire market - and cut further
into the value of Japan's own portfolio.

 Richard Koo, chief economist for the Nomura Research Institute, is one of
many financial soothsayers in Tokyo who work to divine the thinking behind
the shabby door on the fourth floor of the gray pre-World War II Finance
Ministry building marked Director of Foreign Exchange Markets.

As he sees it, anything Japan might do to slow its dollar purchases would
only create a self-inflicted wound. "If they could move it all out of
dollars in one day, I am sure they would do it in an instant," Mr. Koo said.
"But if they move 10 percent, and the dollar goes down 20 percent, they are
stuck with 90 percent of the portfolio worth 20 percent less."

Others in Japan are not happy about how much the dollar has already
weakened.  Toyota, Japan's largest company and its biggest exporter,
complains that for every 1-yen gain against the dollar, the company's annual
profit falls by 20 billion yen, currently $195 million. With Japan's
economic recovery still lagging, its dollar buying serves to help keep its
exports more competitive.

This week, Japanese officials have been talking up the dollar and leaving
the door open to a resumption of specific dollar-strengthening moves. On
Wednesday, Mr. Asakawa's boss, Hiroshi Watanabe, vice minister for
international affairs at the Finance Ministry, responded to a question at a
news conference about intervention saying, "There is nothing to limit our
actions; there are no such concerns."

 Japan and China hold too much American debt to be able to diversify
discreetly. Instead, they are urging the Bush administration, in public and
private, to get the American budget into better balance and to improve
American saving rates.

 "What China and Japan are trying to do is say, 'Please get back on track
with fiscal reform,' " said Robert A. Feldman, chief economist for  Morgan
Stanley Japan.

 China, more than many countries, treats its foreign currency reserves as
not just a way to control the value of its currency in international markets
but also as a form of national savings. That is one reason its traders are
encouraged to take greater risks in search of higher returns.

China used $45 billion from its stash to bail out the state-owned Bank of
China and the China Construction Bank last winter. People close to Chinese
policy makers predict that another $50 billion to $60 billion will be used
this winter to bail out the much larger Industrial and Commercial Bank of
China, also state-owned, and possibly a smaller sum to help the Agricultural
Bank of China.

The Chinese government currency traders, bankers say, have refrained from
the kind of highly speculative trading that led to the $550 million in
losses disclosed this week by the China Aviation Oil (Singapore)
Corporation, which is majority owned by a state-run Chinese company. But the
fees and commissions associated with doing business with the Chinese has
prompted many big Western banks to set up special trading teams in Hong Kong
just to handle transactions for Beijing.

An important job for such teams involves taking Chinese traders to dinner,
Western bankers say, as the Chinese are not allowed to accept gifts. So
fee-hungry bankers fly regularly to Beijing from Hong Kong - some making the
trip practically every week - to take traders out for lavish evenings.

For some, one banker said, this duty can become wearisome. The Chinese
traders enjoy bowling, he said, but they also have a reputation for wanting
to attend Mandarin romantic operas, an acquired taste at best.

James Brooke reported from Tokyo for this article and KeithBradsher from
Hong Kong.

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