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More, not less

17 October 2013 By Andy Mukherjee

Washington’s last-minute deal on raising the U.S. government’s debt ceiling made grim viewing for Asian central banks. It’s the second time in two years they have faced anguish over the safety of their enormous U.S. government bond holdings. But even with an agreement to raise the ceiling until Feb. 7, and default averted, the harrowing experience is unlikely to turn America’s largest creditor group into a bunch of angry sellers. They may in fact do the opposite, and buy more.

There is precedent for such behaviour. China and Japan, the two biggest holders of U.S. government debt, now own 16 percent more Treasuries than they did during the previous round of sparring over the debt limit during the summer of 2011. A 95 percent jump in the same period in the Treasury ownership of the Caribbean banking centres, where Asian central banks often buy to mask their purchases, suggests financial fragility has only tightened the embrace of the dollar. Asia’s biggest eleven economies officially held over $3 trillion of U.S. government securities at the end of July, according to Treasury data.

Asia has a strong motivation for self-insurance. The region’s markets still rely on U.S. debt as collateral for trades, and a crisis – say, a missed interest payment – that pushed down the value of government bonds would only increase the volumes needed to back everyday transactions. Although the region’s central banks have stitched up an array of currency swaps, they remain small, and would be next to useless if all participants became desperate for dollars at once.

There is still no viable substitute for the dollar. Asia doesn’t have a large pool of “safe” assets of its own that are close to cash. Blame it on fiscal rectitude. The region’s governments have run conservative budgets since the 1997 financial crisis, so they don’t produce enough debt to serve as collateral in private loan contracts. Cross-border trades are especially dollar-dependent. Even highly liquid Japanese government bonds are generally not used to post security.

Asia has cause to grumble again about Republicans and Democrats playing dangerous games of chicken. Chinese politicians have been doing so already, and it must be tempting to sell Treasuries out of sheer indignation. But Uncle Sam’s Asian creditors still can’t afford to rebel, even if they do have a cause.   


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