Following the financial crises in the late 1990s, many Asian central banks bolstered their foreign exchange reserves to ward off future runs on their currencies. The combined balance sheets of nine Asian central banks, including China, ballooned to $6.4 trillion in 2011 from $1.1 trillion in 2001.
So far, the rapid rise in foreign reserves has not triggered any instability, but the Bank for International Settlements warned that the risk to financial stability must not be underestimated.
“The rapid expansion of central bank balance sheets arising from many years of foreign exchange reserve accumulation in emerging Asia is raising concerns about inflation, financial instability and financial market distortions,” the BIS said, calling on governments and central banks to consider altering their policies.
“The approach to exchange rate management by countries in emerging Asia is a critical factor, and various reform efforts are currently being considered. Although such efforts are largely driven by the implications of exchange rate management for global imbalances and growth, the risks associated with the size and structure of central bank balance sheets should not be overlooked,” BIS said.
Read more at the BIS: www.bis.org/publ/qtrpdf/r_qt1206.htm