South Korea, Asia’s fourth-largest economy, pared the share of dollars in its foreign-exchange reserves to the lowest level since the global financial crisis erupted in 2007.
Dollar holdings dropped to 60.5 percent of foreign- exchange reserves at the end of last year from 63.7 percent in 2010, the central bank said in its annual report for 2011 released today.
The drop underscores a shift among reserve managers to diversify assets, with China’s yuan and Australia’s dollar among the beneficiaries. South Korea’s government earlier this year announced plans to invest in Chinese equities as well as bonds as the yuan’s international role increases.
“The move to diversify reserves away from U.S. dollars and the euro accelerated last year, largely on weaker fiscal fundamentals and subdued economic conditions in developed markets,” Wai Ho Leong, a senior regional economist at Barclays Capital in Singapore, said in an e-mail. “At the same time, it marked a move into gold, and bonds of stable emerging-market economies, particularly those with better longer-term prospects and currency appreciation potential.”
The central bank boosted the proportion of equity investments to 5.4 percent last year from 3.8 percent, it said. Holdings of foreign government bonds rose to 36.8 percent from 35.8 percent in 2010, the BOK said.
Confidence in Dollar
While the proportion of dollar holdings declined to the lowest since 2007, when the central bank began to disclose details about its asset portfolio, the change doesn’t reflect a lack of confidence in the currency, Kang Sung Kyung, a director at the bank’s Reserve Management Group, told reporters in Seoul today
Other currencies held by the BOK include the euro, yen, pound, Canadian and Australian dollars, Kang said. The central bank holds government bonds issued mostly by the U.S., Japan, Canada, Australia, the U.K., Germany and France, he said.
Foreign-exchange reserves climbed by $4.46 billion to a record $315.8 billion at the end of February as the euro and pound strengthened against the dollar and the central bank made gains by managing assets, according to a central bank statement on March 5.
Choo Heung Sik, the director general of the Reserve Management Group, said in an interview in January that the yuan “has the potential to become a key reserve currency in the long term and thus we are building a channel to invest there.”
The BOK said that month it received approval from the People’s Bank of China to buy bonds and obtained a license as a Qualified Foreign Institutional Investor, or QFII.
“Central banks need to look for higher returns,” said Frances Cheung, a strategist at Credit Agricole CIB in Hong Kong. “Their sterilization programs used to mop up liquidity is creating the pressure for them to look for assets with better returns.”