Where countries put their money
By Graham Searjeant
Asian countries are the dominant holders of the world’s foreign currency reserves. Together, they own about $1,600 billion (£1,000 billion), twice the combined holdings of all governments and central banks of Europe and the Americas.
Reserves usually build up when countries run a continually large balance of payments surplus and when there is a big inflow of investment capital.
China, where this is happening on a grand scale, still has some way to go to catch up with Japan’s $605 billion of reserves. In both countries, reserves have mushroomed as their central banks buy dollars for local currency to keep their exchange rates down.
The reserves of the euro area are $400 billion, of which almost half is held in gold or at the IMF. Foreign exchange reserves are about $200 billion. The Bank of England’s $44 billion is invested cautiously. UK holdings of gold have been run down, partly to bring euro holdings up to 40 per cent and yen to 15 per cent. US Treasury bills are held for liquidity and interbank deposits, government and commercial bonds to boost returns.
Some Asian central banks take a more robust line. One or two hold substantial amounts of company shares.
The IMF says that 65 per cent of all foreign exchange reserves are in dollars, while the euro accounted for 14.6 per cent at the end of 2002.
The huge reserves built by Japan, China and Taiwan stem largely from attempts to keep down the value of their currencies by buying dollars with their own money. They are not necessarily to be envied. They keep industry competitive at the cost of higher import prices, higher domestic interest rates and, in some cases, lower domestic investment.
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