Since the 1997-1998 Asian financial crises, monetary authorities
in emerging markets in East Asia have more than doubled their
stockpiles of foreign exchange reserves; by the end of May 2002,
they held $845 billion, or 38% of the world total. Of these
countries, China, Taiwan, Hong Kong, South Korea, and Singapore
rank just behind Japan as the world’s biggest holders of foreign
exchange reserves–together those five countries hold reserves
totaling nearly $700 billion. There is a growing debate about
the need to hold so many reserves. Some critics point out that
holding a lot of reserves is costly. Reserves held in U.S.
Treasuries, for example, earn a modest return, far below these
countries’ own cost of borrowing either in local currency or in
dollars. Why hold cash in the bank and pay high interest on
outstanding liabilities? Critics also note that the yield on
reserves is much lower than the potential return they could earn
by using those reserves to make real investments in the economy,
such as building ro