Asian policymakers are preoccupied with China's “war of nerves” over the US dollar's global status rather than the impact of the Fed's debt buying on their vast dollar-linked savings, officials told Reuters.
The Federal Reserve's decision earlier this month to buy more than $1 trillion in long-term US debt to push down rates drove the dollar sharply lower, though Asian officials said the actions were unsurprising given how much private lending has slowed.
Much more unanticipated was China's unusually aggressive push last week to replace the US dollar as the top central bank reserve currency, they said.
Officials with direct knowledge of reserve management issues in Japan, India and South Korea, which together hold some $1.5 trillion in currency reserves, were skeptical that such an overhaul of the global monetary system could happen soon.
They acknowledge, however, that the sheer size of their dollar holdings made their substantial reduction problematic.
In contrast, Malaysia and Indonesia, which have smaller reserve stockpiles and hold a combined $145 billion, were already gearing for a change in the reserve currency regime.
China, with the world's largest reserves at $2 trillion - the bulk of it widely believed to be in US Treasuries - demonstrated last week that it is confident about using economic might to protect its interests, Asian officials said.
“China is engaging in a war of nerves with the US as it is trying to see what move the new US administration makes, and the recent comments have been made in that context,” said a Japanese government official.
“But it won't make a drastic shift, given its massive holdings of US Treasuries,” the official, who was not authorized to speak to the media, said.
It will try, however, to protect the value of its dollar holdings by reminding the United States about the need to preserve fiscal health, the official said.
Japan has $1 trillion in foreign exchange reserves, the world's second-largest stockpile. Nearly two thirds of the total were invested in US Treasuries, according to January data, and Tokyo has said it will continue to invest the majority of its reserves in US government debt.
A senior financial official in South Korea, which has $201 billion in foreign reserves, sympathized with Beijing's concerns about the dollar's value.
“There has long been a lot of talk about the persistent weakness of the US dollar and it has become time for someone to stand up and raise their voice. China did.”
But just like Japan, South Korea does not foresee a move away from the dollar any time soon, given its dominance in trade.
Skepticism voiced by some of the biggest holders of US dollars in Asia, where more than half of the world's $6.9 trillion in reserves are housed, may make Beijing's proposals a hard sell at the G20 meeting in London on Thursday.
Still, China may seek something in return for continued Treasury buying as the Fed's increased use of quantitative easing - effectively printing money to boost the economy - ushers in a weak dollar era, said Zhong Wei, professor with Beijing Normal University.
The world's third-largest economy may ask Washington to lower trade and investment barriers or for the US Treasury to issue callable securities, said Zhong, who is editor of China Foreign Exchange, a journal of China's State Administration of Foreign Exchange.
“China has been buying US Treasuries without asking any questions. Now China is going to put its own conditions.”
Last week, Zhou Xiaochuan, governor of the People's Bank of China, in a series of papers intended for an international audience proposed adopting Special Drawing Rights issued by the International Monetary Fund as a dominant reserve currency.
Though he avoided mentioning the US dollar, the proposal implicitly sought to end its dominance as trade and reserve currency, which Zhou said has contributed to global financial instability.
Beijing's increasingly bold overtures on the world stage reflect China's frustration of wanting to diversify its dollar-based assets but finding few attractive alternatives, said Frank Gong, chief China economist with JPMorgan.
The idea of weaning the world off its dollar dependence appealed to emerging economies around the world and central banks in Indonesia and Malaysia said they liked China's proposals.
“A global reserve currency has been discussed in forums and this is a viable proposal that should be considered,” said Zeti Akhtar Aziz, governor of Malaysia's central bank, which has $90 billion in foreign reserves.
Indonesia and China last week agreed on a $14.6 billion currency swap, enabling Indonesia to buy Chinese goods and settle payments directly in yuan, rather than seek US dollars first.
The swap line was a “small step” in anticipation of a diminishing role of the US dollar, said Boediono, Indonesia's central bank governor. (Reuters)