Reserve holdings growing by leaps and bounds

Global foreign reserve assets have been on the rise in recent years. Data shows Asian central banks and Russian and Middle Eastern reserve figures growing rapidly in recent years.

The reasons are quite simple. China and other Asian central banks have been the beneficiaries of huge export-generated revenues, which come largely in the form of U.S. dollars.

“China is exporting anything and everything to the world — that’s what’s causing them to have this influx of U.S. dollars into their economy,” Buskas says.

Recent trade figures with China underscore the extremely large trade imbalance the U.S. continues to have with that country. As of December 2006, the U.S. goods deficit with China came in at $19 billion, down from a $22.9-billion reading in November 2006.

Other factors driving U.S. dollars into the Chinese economy include a deluge of direct investments as American corporations buy Chinese operations and build manufacturing and other infrastructure in China. Also, the Chinese authorities intervene in the forex markets to the tune of $1 billion every trading day.

“They are [buying U.S. dollars] and selling their currency to keep it from appreciating,” explains Michael Woolfolk, senior currency strategist at the Bank of New York. “This is the only way to keep the Chinese currency (the renminbi, or yuan) from going through the roof.”

China grabbed headlines in the financial press in recent months with news that its reserve assets topped $1 trillion, up roughly $200 billion from last year. Analyst projections have this figure growing at about the same pace in 2007.

China is, simply, the world’s largest holder of official reserve assets. Bob Sinche, head of global currency strategy at Bank of America cites data revealing Chinese official reserve assets at $1.06 trillion as of Dec. 31. In second place is Japan, at $874.5 billion as of Jan. 31. Russia comes in third at $295.6 billion, Taiwan is fourth at $266 billion (as of Jan. 31), and South Korea is fifth at $240.2 billion (as of Dec. 31).

Middle Eastern countries are noticeably absent from the list. Oil-producing nations in the Middle East (as well as Russia and some of Latin America) have been beneficiaries of the sharp gains in world oil prices in recent years. As nearby crude oil futures moved from the $32 per barrel area in 2004 to the $60-$80 range in 2006, the Middle East saw a windfall of dollar assets (referred to as “petro-dollars”) into their coffers. However, hard numbers from Middle Eastern central banks are difficult to come by.

Sinche says Saudi Arabia should be in the top five. One way the Saudis disguise their true balances is by channeling funds to the Saudi Arabian Monetary Agency (SAMA). Also, Middle Eastern players are known for obscuring the amount of their U.S. Treasury purchases by stocking up on American fixed-income securities via London investment houses.