Bloomberg Reserve Comment Exaggerates

Bloomberg article "BRICs Add $60 Billion Reserves as Zhou Derides Dollar" claims that the BRIC central banks boosted reserves in May. Yet China has not reported its April reserve figures, let alone May's. The larger point of the report, that the BRIC are accumulating reserves to prevent their currencies from appreciating is probably only partially true. It is helpful to understand the build-up in reserves especially, Russia and India as a replacement to the draw down in reserves in the second half of last year. India lost nearly a fifth of its reserve then. Russia reserves fell by almost 40%.

Brazil, Russia and India's currencies have appreciated. Brazil reai is the strongest of the emerging market currencies since May 1, gaining 9.8% against the dollar. The Indian rupee has gained 5.3% and the Russian rouble appreciated 5%. Arguably the bulk of the these gains reflect more dollar weakness than local strength. The euro itself has risen 4.3% during the period. At least in Russia and India's case, their currency strength gave the central bank the opportunity to do what it wanted to do in the first place--replenish reserves.

US Treasury's data on foreign ownership covers only the first quarter. Brazil was a small net seller of US Treasuries. Russia bought roughly as many Treasuries in Q1 as they did in H2 08. India bought about $9 bln of US Treasuries in Q1 09, about as much as they did in Q4 08, which was roughly the same as the previous two quarters combined. China for its part increased its Treasury holdings by $40.5 bln, which is actually a little below its 2008 quarterly average of $62.3 bln.

Ironically, the country that appears to have stepped up its purchases of Treasuries the most came from an unlikely source--Japan. In the first quarter, Japan boosted its Treasury holdings by almost $60 bln, more than all its purchases in 2008. To be sure this is not the same as reserve growth. In fact, the valuation of Japan's reserves actually slipped in the first quarter (-1.4%).

China and Russia's purchases of Treasuries may confound observers who pay close attention to official rhetoric. First, as is the case with politicians of all nationalities, investors need to pay more attention to what officials do than what they say. Second, many cases, the anti-dollar or US rhetoric should be understood in political terms not economic. Nationalism and traditional balance of power politics can explain much of the verbal barbs. The rhetoric also deflects or preempts criticism of their own economic (and political) policies.