Asian central banks rebuild defences as Fed hike looms

HONG KONG • Asia's central banks are stacking the sandbags. 

Foreign exchange reserves are being rebuilt as the monetary authorities brace themselves for the Federal Reserve's third rate hike in six months. While the expected move has been well telegraphed, long periods of Fed tightening can cause jitters for emerging markets.

Asia was slammed in 2013 when then Fed chairman Ben Bernanke's hint of an end to quantitative easing sparked the "taper tantrum".

The turnaround is being led by China's resumed purchases of US Treasuries, after it cut holdings last year by the most since 2000. The world's biggest reserve pile grew by US$24.03 billion to US$3.05 trillion (S$4.2 trillion) last month - the biggest increase since April 2014 - as a stronger yuan and an easing of capital outflows help the Beijing authorities to shore up their buffer. 

There have been sizeable gains in Malaysia, Indonesia and Singapore too. India's foreign exchange reserves are at record highs, buoyed by strong inflows into the stock market.

"Asia is strengthening its defences," said Mr Frederic Neumann, co-head of Asian economic research at HSBC in Hong Kong. "This will give regional central bankers a stronger hand to counter any potential volatility in the coming months, should the Fed tap the brakes more firmly than expected."

Fed interest rate hikes can reverberate through Asia as capital is lured to rising yields in the United States, sparking financial market volatility and driving up borrowing costs for the region. 

PLUS POINTS FOR ASIA

The region is benefiting from better growth prospects, solid macro fundamentals, advancing of reforms and strong external positions, accompanied by lowering of domestic political uncertainties.

MR BEJOY DAS GUPTA, senior economist for the Asia-Pacific at the Institute of International Finance.

South-east Asia, in particular, is often vulnerable because of US dollar-denominated debt serviced in local currencies, an arrangement dubbed "Original Sin" by economists Barry Eichengreen and Ricardo Hausmann after the region's 1997-98 meltdown.

This time around, calmer markets, a US dollar that has yet to sustain a break higher and a steady flow of money into Asia are giving central banks a window to top up their foreign currency holdings.

Improving fundamentals help explain the reserve build-up. Growth across the region remains solid due in large part to China's economy continuing to defy predictions of a sharp slowdown.

Buoyed also by US and European demand, exports from countries such as South Korea and India are at multi-year highs, even amid worries over rising protectionism.

"We think this current Asian trade recovery has legs, driven by a synchronised global recovery, including rising capital spending in both the US and China," said Dr Chua Hak Bin, a senior economist with Maybank Kim Eng Research.

Money is also pouring back into Asia as investors double down on the economic potential of countries like the Philippines, Malaysia and Indonesia.  "The region is benefiting from better growth prospects, solid macro fundamentals, advancing of reforms and strong external positions, accompanied by lowering of domestic political uncertainties," said Mr Bejoy Das Gupta, senior economist for the Asia-Pacific at the Institute of International Finance.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on June 14, 2017, with the headline 'Asian central banks rebuild defences as Fed hike looms'. Print Edition | Subscribe