Brazil, Russia, India, and China have increased their holdings of foreign exchange reserves significantly over the last decade. But China stands out when it comes to financing the United States. China’s holdings of U.S. financial assets have increased dramatically since 2000. Brazil and Russia have also significantly increased their holdings of U.S. financial assets, but their aggregate increase is still small relative to that of China’s.
Some assets on the Fed’s balance sheet are short-term credits than could be withdrawn easily if confidence in financial institutions returns, but the Fed has also been buying longer term assets that are harder to unwind. Should the Fed keep buying assets to signal its determination to fight deflation, or does the Fed need to think about how to unwind some of the programs to demonstrate that the expansion of its balance sheet won’t lead to inflation?
World trade has contracted sharply as global demand has collapsed. U.S., European, and Chinese demand for world goods dried up in the last quarter of 2008 and first quarter of 2009. But optimism is growing that recession may be nearing a bottom. Will there be signs of “green shoots” in trade as well?
China’s total foreign assets, including its dollar assets, have grown substantially. China is worried about the risks associated with holding large amounts of dollar assets, as evidenced by its call for a new global reserve currency. Is it appropriate for so much of a poor country’s national wealth to be invested in a rich country’s low yielding assets? And what risks does the U.S. run by relying heavily on a single country’s government for financing?
The Association of Southeast Asian Nations (ASEAN) along with Japan, China, and South Korea says it will launch a $120bn reserve fund, increasing the foreign exchange reserves that the region can draw on in times of turmoil. Japan has offered an additional $60bn via a swap line. Can regional funds provide an Asian alternative to the IMF?
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