Buttonwood RESEARCH TOOLS Economist.comsuRveYs Oriental mercantilists Sep 18th 2003 From The Economist print edition Asia's addiction to cheap currencies must end. But not overnight THE average homeowner in Peoria has probably never heard of Toshihiko Fukui, Zhou men, respectively bosses of the central banks of Japan, China, Hong Kong, Taiwan and souts o Xiachuan, Joseph Yam Perng Fai-nan or Park Seung. But he has a lot to thank them for. The Korea, have become the world's most enthusiastic purchasers of American government debt and Fannie's bonds keeps the dollar relatively strong and mortgage rates in Peoria down adie's including that of the mortgage giants, Freddie Mac and Fannie Mae. Their appetite for fre Between them these five Asian central banks hold around $1. 3 trillion in official reserves (or over half of the global total, most of them in dollar assets. Since Piling December 2001, Japans reserves have shot up by 36%, Foreign-exchange reserves*, latest, sbr China's by 65% and Taiwan's by 49%(see chart 10) 0100200300400500600 The Asians passion for American bonds is explained by their desire to stop their currencies appreciating against the dollar. China and Hong Kong fix their currencies against the dollar, in Hong Kong s case through a South Korea currency board. That means a current-account surplus orHong Kong big capital inflows automatically translate into higher Singapo reserves. The other countries ostensibly let their currencies float, but heavy intervention by central banks Source: National statistis Excluding gold, except Singapore has ensured that Japan's yen and South Korea's won have risen by over 13% against the dollar since the beginning of 2002, compared with a 25% increase for the euro another floating currency(see chart 11) For the man from Peoria(and for Americas economy) this has brought a short-term benefit. The dollar's fall over the past 18 months has been smaller and more gradual than it would have been without the Asians ntervention. The trouble is that the asian dollar binge is utting off the inevitable adjustment to Americas current-account deficit America continues to accumulate foreign debt at an ever faster rate so the eventual adjustment will be correspondingly bigger. At the same time a disproportionate share of whatever decline in the dollar does materialise falls on those countries that let heir currencies float, especially the euroOriental mercantilists Sep 18th 2003 From The Economist print edition Asia's addiction to cheap currencies must end. But not overnight THE average homeowner in Peoria has probably never heard of Toshihiko Fukui, Zhou Xiachuan, Joseph Yam, Perng Fai-nan or Park Seung. But he has a lot to thank them for. These men, respectively bosses of the central banks of Japan, China, Hong Kong, Taiwan and South Korea, have become the world's most enthusiastic purchasers of American government debt, including that of the mortgage giants, Freddie Mac and Fannie Mae. Their appetite for Freddie's and Fannie's bonds keeps the dollar relatively strong, and mortgage rates in Peoria down. Between them, these five Asian central banks hold around $1.3 trillion in official reserves (or over half of the global total), most of them in dollar assets. Since December 2001, Japan's reserves have shot up by 36%, China's by 65% and Taiwan's by 49% (see chart 10). The Asians' passion for American bonds is explained by their desire to stop their currencies appreciating against the dollar. China and Hong Kong fix their currencies against the dollar, in Hong Kong's case through a currency board. That means a current-account surplus or big capital inflows automatically translate into higher reserves. The other countries ostensibly let their currencies float, but heavy intervention by central banks has ensured that Japan's yen and South Korea's won have risen by over 13% against the dollar since the beginning of 2002, compared with a 25% increase for the euro, another floating currency (see chart 11). For the man from Peoria (and for America's economy), this has brought a short-term benefit. The dollar's fall over the past 18 months has been smaller and more gradual than it would have been without the Asians' intervention. The trouble is that the Asian dollar binge is putting off the inevitable adjustment to America's current-account deficit. America continues to accumulate foreign debt at an ever faster rate, so the eventual adjustment will be correspondingly bigger. At the same time a disproportionate share of whatever decline in the dollar does materialise falls on those countries that let their currencies float, especially the euro