TOKYO -- Governments and central banks in Asia held a record-high level of U.S. treasuries and other foreign assets at the end of July.
Combined foreign reserves in Asian countries and regions excluding Japan and China reached $2.4 trillion at end-July, up 6% from a year earlier, according to data from central banks. Indonesia saw its reserves grow 15% in the past year. The pace of growth in the region has accelerated since the beginning of the year and foreign reserves have now grown sixfold from their levels during the 1997 Asian financial crisis.
With such high levels of foreign reserves, Asian economies and their monetary systems are in a good position to withstand financial shocks. But Asian economies are still vulnerable if Western countries continue to tighten their monetary policies. With foreign investors pouring money into Asian markets keen on their potential for high growth, some monetary authorities are selling local currencies and buying U.S. dollars. Asian governments are generally anxious to prevent any sharp appreciation of local currencies that would make their exports uncompetitive.
The Reserve Bank of India is one such body that has been selling rupees and buying dollars, according to an executive of a bank operating in Mumbai. "A significant amount of money is pouring into the country from Japan and elsewhere, and the central bank is desperate to block appreciation of the rupee," the source said.
Investors have been flocking to India whose economy has been growing steadily at an annual rate of 6-7%. Foreign investment in Indian securities has reached the highest level since 2014 when Prime Minister Narendra Modi took office. Despite the central bank implementing another cut of its key interest rate to 6% in August and currency intervention by monetary authorities, the rupee is still hovering at a two-year high.
But unlike India, China, the largest holder of foreign currencies, has been actively maintaining a floor for the yuan. At the end of July, China's foreign reserves reached $3.08 trillion, marking the sixth straight month of rises. With the yuan trading in a range acceptable to Beijing, local authorities no longer feel the need to sell dollars to prop up the yuan.
Generally, Asian economies are in a positive cycle of growth, low inflation and stable interest rates. Such conditions improve trade balances and countries' capability for international payment. As countries' current accounts turn surplus, and bad debt declines, Asian economies are becoming more resilient to capital outflows, said the Bank of Japan.
Asia is exposed to huge debt levels. With large infrastructure projects ongoing across the region, lenders cautious about the possible failure of repayment tend to arrange short-term loans for such projects. A big worry is that if there were to be a sharp withdrawal of funds by foreign investors and lenders, Asian countries could face problems refinancing.
As recent as 2015, a series of devaluation of the Chinese currency, as well as projections that the U.S. Federal Reserve could start hiking interest rates for the first time in nine years, triggered the selling of Asian currencies. The Indonesian rupiah fell to its lowest level since the 1997 crisis then.
Teppei Ino, a senior analyst at the Bank of Tokyo-Mitsubishi UFJ, said: "Central banks in the region are trying to secure foreign reserves as much as possible, preparing for possible drain of money in the future."
For now, the main concern among Asian economies is to keep local currencies at an even keel.
"We are concerned about the baht getting stronger" is a common refrain in Thailand, especially in the automobile and other export sectors that form the pillars of the economy. The Thai monetary authorities are thought to be actively selling the baht and buying dollars.
Since the credit crisis hit global economies in 2008, the Fed and European central banks have maintained ultra-easing monetary policies. But the time will likely come that such countries start to tighten their policies and Asian countries are on high alert for such an eventuality.