The Asian Dilemma
With an end reaching to impasse over the US government shutdown, the Asian Central Banks must have heaved a sigh of relief. The last minute decision to lift up the US government’s debt ceiling raised cheers in the Asian camps which were stressed by the log-jam for second time in two years.
For the reason, Asian banks have considerable stake in the US government bond holdings, the standoff was very frustrating.
Although, default stands averted with an agreement to raise the ceiling until February 7, same situation may return to haunt again the next year. But still, the largest creditor group of America wouldn’t turn out to be sellers no matter how worse the situation gets. The Asian creditors know one phrase ‘buy more of American securities and bonds’ no matter what your aunt next door teaches you.
However, all this doesn’t come without any reason.
If we look back into history and analyze statistics a little, we will come with some interesting facts. Just taking example of two of the largest economies of Asia, China & Japan, the two major holders of the US debt, they are at present holding around 16% more US Treasuries than probably during the last time the US defaulted on its debt in the year 2011.
As per a column in Business Standards, if we evaluate Treasury ownership of the Caribbean banking centers, a 95% increase can be witnessed in holding of American Treasuries by Asian central banks. In the same column it’s mentioned that together 11 Asian economies hold over $ 3 trillion of US government securities at the end of July this year.
It’s intriguing to know that as the dollar is depreciating in value currently, Asian central banks including China’s (the largest credit lender to the US among all the Asian peers) are getting motivated to increase their position in the Treasuries.
The trend may be explained in the way that region’s markets still very much rely on the US debt for collateral for trades.
The other reason is that there is no effective alternative for the dollar currently and the Asian countries lack some safe performing assets of their own as well. The trades with other nations are dollar denominated and governments themselves are running on minimal budgets.
So, the Asian central banks will be playing foolish if they decide to disregard the importance of the dollar even in their wildest of dreams.