[ Interview with financial market expert Heribert Dieter ]

“Asia wants to protect itself from financial crises”

Dr Dietr, why does Asia need such high currency reserves?
By buying US dollars, Japan aims to weaken its own currency in order to make Japanese products cheaper on the world market. In the case of China and other countries of the region whose exchange rates are pegged to the dollar, the main motive is to protect their currencies against new attacks. The lesson these countries have drawn from the Asian crisis is that they need sufficient foreign exchange reserves to support their currencies in the event of turbulence.

Are their reserves big enough? Can Asia protect itself on its own?
During the Asian crisis, bilateral and multilateral donors supported Indonesia, South Korea and Thailand with a total of US$ 110 billion. The reserves of these three countries, which were most severely hit by the crisis, are now twice as high. So we should not underestimate the stabilising effect of the Asian currency reserves. The higher they are the less likely it is that an attack will bring down a currency.

Is the expenditure on currency reserves still tenable compared to other public spending?
It would be better, of course, if the money were not deposited with the central bank as low-interest US government bonds, but rather invested in education, infrastructure and other sectors. However, in view of the experience of the Asian crisis when there was no appropriate assistance from the International Monetary Fund, and considering the fact that in part the IMF links its support to conditions that are hard to understand, it is wise to make your own provisions. It would make more sense, though, if the countries would do that as a collective rather than every one for itself.

In reverse, this means that progress in stabilising the international finance system would relieve potential crisis countries and free money for other tasks.
Correct. If the political will existed to stabilise international exchange rates, Asia would not have to accumulate such high reserves.

Why does Asia buy mainly dollars? Why doesn’t it invest more in other currencies?
Countries such as China, whose currencies are pegged to the dollar, must stabilise their exchange rate to the dollar; the exchange rate to other currencies is less important. That’s why it makes sense to buy dollars. On the other hand, one of the most disagreeable jobs at present must be that of the President of the Chinese Central Bank, who is sitting on US$ 400 billion, which is losing value every day. Holding such high reserves at a time of a falling dollar exchange rate is an additional burden for the Asian countries.

What impact does the Asian strategy have on the US economy?
For the US economy, this is currently the best of all worlds. People are consuming without having to save, and are financed by Asian central banks. The risk is that at some time the Asians could stop buying US government bonds. The US Federal Reserve would then be compelled to raise interest rates drastically in order to attract foreign capital, or the US government and the consumers would have to stop borrowing at short notice. This scenario has, of course, been forecast for many years without it having happened so far.
Questions by Tillmann Elliesen.