Asian central banks' foreign exchange reserves shrank by $120bn in October, a fivefold increase on the September fall. There are several reasons for the depleted kitties. Valuation effects lop off some of the headline number: about 60-65 per cent of Asian reserves are reckoned to be in dollars, but maybe a fifth are in depreciating euros. Balance of payments positions are generally deteriorating. Some banks are providing dollar liquidity to the market, as well as dipping into reserves to defend the currency – Korea is one example. In addition there is further dollar-dumping as banks unwind forward purchases of dollars that they undertook in recent years as part of mercantilist policies to keep home currencies weak. Data is poor, but these sales total perhaps another $120bn or so.
The US can live with this ebb and flow of Asian demand for dollars so long as China keeps buying. China is now the biggest holder of American public debt, holding $585bn of Treasury bills, notes and bonds, according to US data. Happily, its $1,900bn of reserves are still growing, even if the pace of reserve accretion is slowing.
Nascent signs of the capital flight that has befallen other Asian economies, prompting currency depreciation and subsequent exchange market intervention, are starting to surface. China's September accumulation of reserves, unusually, was below the sum of the trade surplus and foreign direct investment. That could signal a small capital outflow. Ostensibly there is no pressure on the renminbi, which is roughly tracking the appreciating dollar. But intra-day movements, as broker Stone & McCarthy notes, point to central bank intervention to keep the renminbi within its trading bands. October data of Chinese capital flows should provide a better indication – and will be required viewing in Washington.