Asian Central Banks Currently own about 1.1 trillion in US debt, making them the largest US creditors. However, these banks appear to be growing tired of this role. Starting with China then followed by Japan and South Korea, all three central banks have publicly stated they will start to move away from their position as US creditors, meaning they would purchase fewer US Treasury bonds. Next, all three also retracted this statement within 24 hours. However, according to Treasury International Capital data, all three are now purchasing far fewer US Treasuries than before. In other words,
the data indicates the first statement from these banks was in fact their actual policy while the second statement was merely to prevent a selling panic in the market.
Next, Asian banks formed the Bellagio Group, a group consisting of all the major Asian central banks. Considering the growing interdependence of Asian economies, this group seems to be a natural step in the process of furthering regional interdependence. However, China, Japan and South Korea are all members. This indicates the group's covert purpose may be to figure out a way to extricate themselves from the position of US creditors.
Now there is news of the central banks increasing the size of their currency swap agreements. Dow Jones reported
"The Bank of Korea on Friday signed local-currency swap agreements worth the equivalent of $3 billion with the Bank of Japan and $4 billion with the People's Bank of China as part of a planned expansion of ties between Asian central banks.
The signing ceremony comes after finance ministers from South Korea, Japan and China agreed at a meeting of Asean+3 nations in Istanbul earlier this month to expand existing currency swap agreements, the South Korean central bank said in a statement.
Under the agreement between the BOK and the BOJ, the two central banks may draw from the other's won or yen funds when there is a short-term liquidity crunch under normal circumstances to achieve financial stability.
The BOK and BOJ already have a dollar-denominated currency swap agreement in place. That agreement was first signed in 1999 and was increased in size to $7 billion from $5 billion in 2001."
These countries are in a very difficult situation. If they move to sell US Treasuries they could incite a selling panic. This would lower the value of the US dollar on the currency markets. A lower dollar would in turn lower the value of each central banks respective capital base. This could seriously hamper each bank's ability to control interest rate and monetary policy within their respective countries. In other words, selling Treasuries would akin to throwing a boulder into a pond with massive ripples occurring as a result.
One way to stem the effect of these ripples is to have sufficient capital available to inject into the banking system to ease public panic. This is where the currency swaps come in. By having access to sufficient foreign credit, each central bank has the ability to calm its own internal market, easing panic and maintaining financial stability.
I think it is highly likely the Asian banks really have to idea what they will do regarding their exposure to US debt. It's just as likely they will maintain their current position of US Treasury bonds as they will sell them. However, the banks are clearly moving in the direction of creating the option of selling their US Treasury assets. Their slow moves are entirely consistent with Asian philosophy, which has a far longer concept of time than western financial thinking. They are making slow and deliberate moves.
Either Jerome a Paris or London Yank uses the phrase dollar dump, although I forget which. Please consider this my hat tip to the creator of the phrase, whoever it is.