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Source link: http://archive.mises.org/6143/bank-of-korea-to-lend-reserves/

Bank of Korea to Lend Reserves

January 21, 2007 by

The Korea Times reports in this article on the increasing difficulty that the Korean central bank is having in managing its foreign (mostly dollar) reserves.

China Daily reports Nation to explore, expand use of forex reserves

From the KT:

    The country’s foreign currency reserves increased $28.6 billion last year to $238.9 billion, marking the world’s fifth largest holder of foreign currencies. China is the largest holder of foreign currencies with $1.01 trillion as of the end of October, followed by Japan with $896.9 billion, Russia with $283.4 billion and Taiwan with $265.1 billion, according to the central bank.
From China Daily:
    Chinese Premier Wen Jiabao said that China would steadily push forward the foreign exchange rates reform and actively explore and expand the use of its US$1.06-trillion foreign exchange reserves.

    Analysts claim that the US$1.06-trillion reserve could buy Microsoft, Citibank, and ExxonMobil Corp. as well as General Motors and Ford.

    On Monday, the People’s Bank of China, or central bank, announced that its foreign reserves, already the world’s largest, hit US$1.0663 trillion at the end of last year, up US$247.3 billion from the end of 2005.

    China needs foreign exchanges to meet its payment requirement for import and export. Apart from that, the surplus should be best allocated and invested to achieve highest returns, said Lin Yifu, a renowned economist from Peking University’s China Center for Economic Research.
The Bank of Korea (BoK) has accumulated most of its reserves in an attempt to frustate the rise of its currency against the US$. The BoK, instead of directly investing the dollar reserves, is reportedly issuing what are in effect margin loans to Korean banks for the purchase of foreign securities.

The Korea Times writes:

    The measures are expected to fuel demand for dollars in the currency market, helping stem the won from becoming stronger against the dollar. At the same time, the BOK can use its won reserves to ease its deficit, which has grown sharply in recent years, BOK officials said.

    “The growing foreign exchange reserve has been of great concern to us,” a BOK official said. “To cope with the problem, we plan to expand the use of currency reserves for companies and banks. To some extent, this will be helpful in easing the surging deficit at the central bank.”

The upsurge in dollar reserves, according to the article, is due to a rise in the issuance of “currency stabilization bonds” (a form of sterlization) and an increase in the reserve requirement for commercial banks. The latter refers to the ability of Korean fractional reserve commercial banks to expand credit on a base of foreign currency deposits.

I have written on the topic of growing non-US central bank reserves here and here. In short, several central banks and other government reserve funds have been accumulating dollars at a rapid rate and are adopting various “investment” strategies in order to earn a return on them. As these reserve holdings continue to grow at a rapid rate, the pressure on government bodies to “invest” them will continue to build.

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