Mighty Asian financial institutions are reshaping global capital flows

WHEN the Federal Reserve raises interest rates, the effects are felt far and wide. Capital shifts in and out of the huge stock of global dollar-denominated assets. The Fed is expected to act forcefully over the next year, raising rates to around 3 per cent, the highest level since early 2008. But this time the response of the biggest foreign holders of dollar assets, particularly those in Asia, could hold surprises. A burgeoning group of large private institutions is changing, and potentially complicating, the picture.

Ten years ago “official” foreign investors—mainly central banks managing their currency reserves—held US$3.4 trillion in American Treasuries, about three-quarters of all Treasuries held abroad. Anyone wanting to understand the huge flows in and out of dollar bonds therefore kept an eagle eye on the big reserve managers.

There has been plenty of movement of late. China’s reserves—the largest single foreign stash of Treasuries—fell by US$68 billion in April, 2 per cent of the total and the largest monthly drop in more than five years. Japan’s reserves declined by US$31 billion, the biggest-ever monthly fall. India’s reserves shrank by US$26 billion in March, the most since the market panic of October 2008. Those in South Korea and Taiwan have fallen, too.