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IMF dispels economic `urban myth'

Asian central banks are among the top holders of US Treasury securities but the widely held view that they are effectively financing the massive US current account deficit is flawed, the International Monetary Fund (IMF) says.

Another perception the IMF wants to debunk is that the Asian central banks scramble to buy US dollars because they desperately want to keep their currencies low and make their exports more competitive.

Japan, China, Taiwan, South Korea, Hong Kong, Singapore, India and Thailand are among the major foreign holders of treasury securities, according to the latest figures released by the US Treasury Department.

The theory goes that by purchasing huge amounts of dollar-denominated US government securities, the region's cash-flush central banks are not only pushing up the value of the greenback to keep their exports competitive but also financing the current account deficit of the world's richest economy.

The US current account deficit for last year was a record US$666 billion and the IMF expects the gap to rise to US$759 billion this year and US$805 billion in 2006 -- 6.1 percent of US gross domestic product.

Analysts have warned that if the Asian central banks stopped buying dollar-denominated bonds, the dollar would fall dramatically against their currencies, US interest rates would rapidly rise and the US economy -- a major support to global growth -- would slow.

But a quick look at the composition of capital flows into the US dispels any notion that Asian and other foreign central banks are the main purchasers of US Treasury securities, IMF studies show.

Overall, the bulk of US assets sold to foreigners are still to the private sector, IMF's chief economist Raghuram Rajan said.
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