ANALYSIS-Asia's surplus FX reserves: a problem of plenty

By Alan Wheatley, China Economics Editor

BEIJING, May 12 (Reuters) - Money can't buy you love, sang the Beatles. Nor, as Asia is discovering, can $4 trillion in foreign exchange reserves pave a swift path out of poverty.

If the Chinese government has set up a sovereign wealth fund, and India's is debating whether to follow suit, it is because they cannot tap at will the fabulous sums in the coffers of their central banks to finance badly needed development spending.

This is not really the people's money.

Reserves accumulated from fiscal surpluses -- think Singapore's Temasek Holdings -- or from a bonanza of natural resource revenues, as with Gulf oil funds, do represent genuine "sovereign wealth" that can be spent without incurring debt.

But Asia has built up its reserves mainly through intervention by its central banks, which buy dollars by issuing debt or local currency.

In other words, the foreign-exchange assets have counterpart liabilities. What if, to simplify things, the exporter that sold dollars to its local central bank asked to buy them back? So if a government wants to spend the reserves, it must first buy them.

"If China's reserves were like Saudi Arabia's, like manna from heaven or 'free' fiscal assets, then of course they could pour billions into strengthening the pensions system, the health system, the education system or any other socially productive investment," Donghyun Park, an economist with the Asian Development Bank, said in an interview from Manila.

"But unfortunately for China, its reserves are not free fiscal resources. They're central bank reserves," said Park.