Asian banks likely to continue buying US bonds despite losses

Asia's richest central banks would likely shrug off portfolio losses from a US sovereign credit rating downgrade and keep buying US Treasuries to help maintain market stability, officials and other people with direct knowledge of policymaking say. A US rating cut would weaken the dollar and wreak havoc on investments around the world benchmarked against Treasuries, but the sources said it would not cause China, Japan, India and South Korea to change their reserve policies because there are no alternatives to the liquidity afforded by the dollar. Those four countries control about half of the world's foreign exchange reserves. "They [central banks] are not competing against mutual funds or hedge funds. If they make a loss it is okay, as long as they are sticking to the investment policy imposed from the very top, because they are not concerned with short-term gains or losses," said a person familiar with the thinking of Chinese reserve managers, who spoke on condition of anonymity because of the sensitivity of the issue. "The US Treasury bond is a partnership the Chinese Government holds," the source added, stressing that selling down dollar-denominated assets could hurt the political relationship between China and the US. China is the single largest US creditor, holding $768 billion (Dh2.8 trillion) of Treasuries in March, up 56 per cent in the last year. Beside China, other Asian central banks have also been replenishing their foreign reserves. In April, reserves in Asia ex-China rose $15.2bn to $2.46trn. While some private economists said a US downgrade is highly unlikely, none of the Asian officials dismissed the possibility, though they said it would have a limited impact on their reserve management policy. "Even if there is a risk of a US downgrade it is not feasible for central banks to move investments quickly as it would have implications for the global markets," said a Indian central bank official who was not authorised to speak with the media. "Moreover, US markets are still the most liquid and the deepest in the world." India has $260.63bn in foreign reserves, the fifth-largest in the world. It has been rapidly adding to its Treasury holdings, owning $38.2bn in March compared with $11.8bn a year earlier, US Government data show. "A rating is one of many yardsticks we look at when we manage reserves. It is nothing more, nothing less," said a senior official at Japan's Ministry of Finance. "Safety and liquidity are what we care about the most when we manage reserves," the official said. Japan's foreign reserves were $1.01trn as of April, the second-largest stash of currency reserves in the world. Japan owned $687bn in Treasuries at end-March, up 15 per cent from a year ago. Worries about the rapidly growing US fiscal deficit and debasement of the dollar could keep upward pressure on Treasury yields, making it perhaps more attractive to put off purchases of US debt and reach for higher yields later. Keep up with the latest business news from the region with the daily Emirates Business 24|7 newsletter. To subscribe to the newsletter, please click here .