IT MIGHT SEEM cause for celebration. Taiwan was already a standout economic performer in a pandemic-plagued world, and its good run, fuelled by semiconductor sales, is continuing. Orders for its exports soared by an eye-watering 49% in the first two months of 2021 compared with a year earlier, according to data released on March 22nd. There is just one snag: export strength has become awkward for officials in Taipei, for it attracts unwanted attention. America’s Treasury has already placed Taiwan on its “monitoring list” for countries that manipulate their exchange rates, and the boom only adds to the harsh glare.
If it is any solace to Taiwan, it is far from alone in drawing such scrutiny. Across Asia foreign-exchange reserves—a good proxy for currency intervention—have soared. Excluding China (where the data are trickier to interpret), reserves in the next ten largest Asian economies increased by about $410bn last year, the biggest annual jump on record, according to calculations by The Economist.
Some of the other countries in the same boat as Taiwan are part of the Asian manufacturing complex which has benefited from resilient overseas demand for electronics and consumer goods amid the covid-19 lockdowns. In Vietnam, for example, exports grew by 6.5% last year. With its currency, the dong, loosely pegged to the dollar, much of those trade receipts wound their way into official foreign-exchange reserves (the central bank issues dong to buy excess dollars from commercial banks at a quasi-fixed exchange rate).
Other countries recorded big net currency inflows in tougher circumstances. In the Philippines and India exports slumped, but imports fell more sharply. Both countries swung from current-account deficits to large surpluses last year.
The controversial question is whether the build-up in reserves is, from a global perspective, bad. The case against reserves is that, since they stem from efforts to suppress currency appreciation, they represent a beggar-thy-neighbour trade policy: boosting your exports at the expense of others. Yet there is also a case for reserves. For small open countries, the goal may be to minimise disruptive exchange-rate swings, not to keep a currency cheap. And for developing countries, reserves are a liquidity backstop if foreign capital dries up, as it did for many last year.
That distinction matters in Asia. It seems absurd to fault some of the poorer countries. During the “taper tantrum” of 2013, when emerging markets sold off over fears of American monetary tightening, India and Indonesia were among those seen as vulnerable because of their reliance on external financing. Bigger buffers should make them more stable. If they can wrestle the pandemic under control this year, it is likely that their imports will rebound and their current-account surpluses will diminish. The increase in their reserves would end up looking like a healthy aberration, not a malign trend.
The gains in richer countries—especially China, South Korea and Taiwan—look more objectionable. They themselves seem to be aware of this. Most notable is China, which appears to have taken steps to conceal its good fortune. Its central bank’s foreign reserves have risen by $97bn since the start of 2020, making for a relatively modest increase of 3%. But there has been a marked jump in net foreign assets held by its commercial banks, which are up by $183bn, or 27%, over the same period (see chart). One possibility is that the commercial lenders have acted as proxies for managing reserves. Currency traders in China say big state-owned banks have indeed been major buyers of dollars at moments of maximum yuan strength.
The best defence for these three countries is that they have wanted to check the speed at which their currencies appreciate, particularly given the uncertainties of the pandemic. Even with their accumulation of reserves, the currencies of China, South Korea and Taiwan are all up by about 5% against the dollar since mid-2020. As time goes on it will get harder to use that defence. Still, the pandemic promises to leave a key oddity of the world economy intact: treasure chests of reserves in Asia that are accumulated, held, and spent in order to insulate economies from global currency markets that policymakers don’t trust. ■
Source: Finance - economist.com
