Voracious purchases of US Treasury bills by Asian central banks are coming under scrutiny ahead of presidential elections amid concerns over national security and a ballooning current account deficit.
Led by Japan and China, Asian economies have been gobbling up US dollar based assets, particularly US Treasuries running into hundreds of billions of dollars, over the last two years.
By investing in US securities, the Asian economies stash away proceeds from selling their own currencies in an attempt to prevent them from rising against the dollar and so making their exports cheaper and more appealing to American consumers.
Some say that while the massive Asian holdings may keep US interest rates low and help bankroll America's debts, they are propping up the US record 541.8 billion dollar current account deficit - the balance of goods and services between US and the rest of the world.
Others fear that such immense US wealth in foreign hands could boomerang if, for example, the assets are unloaded abruptly in a deliberate attempt to destroy the American economy.
Lawrence Summers, Harvard University President and US Treasury Secretary under ex-President Bill Clinton, likened the Asian purchases to hoarding of gold by European states centuries ago.
"Much has been made of US dependence on foreign energy, but the country's dependence on foreign cash is even more distressing," Summers said in the latest issue of the US magazine, Foreign Policy.
"In a real sense, the countries that hold US currency and securities in their banks also hold US prosperity in their hands," he said. "That prospect should make Americans uncomfortable."
Foreigners already hold almost 40 percent of marketable US Treasury debt. The Asian central banks have increased their holdings of US assets to about one trillion dollars, according to market estimates. At the recent Democratic party convention that endorsed John Kerry as the party's flag bearer against Republican President George W. Bush in November polls, Clinton took a swipe at the Bush administration for allowing foreigners to have a potential financial lever on the US economy.
Clinton said the government was effectively "borrowing from foreign governments, mostly Japan and China" to make up for the burgeoning budget deficit, forecast to reach a record 445 billion dollars this year.
Federal Reserve Chairman Alan Greenspan acknowledged concerns in a speech in March about any impact of a sudden bail out by Asian central banks from the US Treasury market but felt the possible effects would be small.
Asian central bank reserves are heavily concentrated in short-term maturities and the size of their asset holdings is small compared to the overall market in short-term dollar assets, Greenspan said.
Morris Goldstein, a senior fellow of the Washington-based Institute of International Economics, said the root of the problem was the rising US current account deficit.
"The concern about official holders, particularly in East Asia, is part of the problem that the US current account deficit is just too large and that's what give rise to financing and that's what give rise as it gets larger and larger to official holders," he told AFP.
Goldstein also highlighted what he called the problem of Asian countries refusing to adjust their exchange rates upwards in line with the market.
"That's another problem why they are accumulating (US assets) because the rates are undervalued and, in some cases, the countries are using prolonged one way exchange market intervention to defend them - which is inappropriate and manipulation and ought to stop," he said.
Both Bush and Kerry have accused Beijing of seeking to boost exports by keeping its currency artificially low, highlighting China's 124 billion dollar trade surplus with the United States last year.
The US government says growing participation of foreign investors, including by Asian central banks, in the US Treasury market lowers borrowing costs and reflects confidence of external lenders in the United States.
But some members of a high level market advisory panel have proposed that Washington prod Asian central banks which are large holders of US Treasuries to participate in repo markets, officials said.
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