hankyoreh

Asian countries are unloading U.S. Treasury securities and expanding their investments in stocks and currencies in denominations other than the U.S. dollar. The resultant loss in U.S. foreign currency reserves could forecast an overall economic downturn for the United States.

According to data posted on the U.S. Treasury Department’s web site over the weekend, outstanding U.S Treasury securities held by Korea and Japan amounted to US$52.1 billion and US$615.2 billion as of the end of May. This year alone, net sales for the two countries amounted to $14.6 billion and $7.7 billion, respectively. China, which added $86.9 billion in U.S Treasury notes with three years or longer in maturity last year, bought a mere $10.5 billion during the first five months of this year.

As for Treasury notes with three years or longer in maturity, which most Asian countries prefer to other [[[securities ]]], the change becomes more apparent. During the first five months of this year, Korea, China, Japan, Taiwan and Hong Kong sold a combined $10.4 billion worth of the Treasury notes. This figure compares with the combined $52.8 billion in net sales of securities that the five Asian countries bought last year.

Song Tae-jeong, a researcher at the LG Economic Research Institute, said, “For the past decade, Asian countries have functioned as exporters of capital to the United States, offsetting its current account deficit. But changes in the global economic framework are underway.”

In the process, the ratio of foreign reserves in U.S. dollars is steadily on the decline. The International Monetary Fund said that the ratio of dollar-denominated foreign reserves was 66.7 percent at the end of 2005 but the figure fell to 64.6 percent in 2006 and to 64.2 percent at the end of the first quarter this year.

Experts say that the declining investment in U.S. Treasury securities and the dollar could increase the burden on the U.S. economy. Oh Seok-tae, a senior researcher at Citibank, said, “The reason why the U.S. propped up exports of other countries, despite the ballooning deficit, was because the money they earned came back to the U.S., helping the U.S. secure much needed funds. A decrease in the money coming from Asian countries signifies a huge disaster for the U.S. economy.”

The U.S. posted $811.5 billion in current account deficit last year, which accounted for 6.1 percent of its gross domestic product. Foreign capital amounting to $716.8 billion came as a savior for the deficit-tainted economy. As a change in Asian countries’ position on the U.S. dollar, however, is expected this year, prices of U.S. Treasury bonds are falling while long-term interest rates continue to rise. Until late last year, the interest rate for 10-year Treasury notes stood at the mid-4 percent range but jumped to as much as 5.26 percent as of June 12, before stabilizing at the 5-percent range in the following weeks.

The rising interest rates could put yet another drag on the U.S. economy as experts worry that problems in the subprime mortgage sector could prompt a slowdown. Ben Bernanke, chairman of the U.S. Federal Reserve, decreased the economic growth forecast for this year to 2.25-2.5 percent from the previous 2.5-3.0 percent on July 19, saying that subprime mortgage problems are more serious than he had expected.

Jeon Chang-hwan, professor of Hanshin University, said, “A decline in money flow to the U.S. means that the dollar could lose more ground down the road... A slowdown in the U.S. economy prompted by the subprime mortgage crisis could magnify financial instability in the global market when it coincides with the outlook for a weak dollar.”

Shin Yong-sang, a researcher of the Korea Institute of Finance, noted however, “Asian countries have yet to go on a U.S. Treasury security selling spree.”

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