Once investors realised that this was unsustainable, capital took flight and the country's foreign reserves dwindled.
The main indicator of a country's intervention in currency markets is its level of foreign reserves.
The advantage of a fresh SDR issuance is that it immediately augments countries' foreign reserves without needing to be lent.
In the absence of more drastic actions, it seems certain China's foreign reserves will top US$2trn within this year.
To offset this extra liquidity, the bank “sterilised” the increase in foreign reserves by selling securities to banks.
The Indian government found itself with foreign reserves that were worth just two weeks' worth of imports.
Modest domestic capital flight coupled with an unwind in foreign borrowing can make a serious dent in foreign reserves, impart significant depreciation pressure, or both.
Much of the foreign money it has attracted has gone into inflating share prices or just accumulated unproductively in foreign reserves.
For instance, low bond yields and the dollar's refusal to plunge are partly due to the way these countries have been piling up foreign reserves.
One idea is for Japan to follow in the steps of Singapore and Scandinavian countries, which invest foreign reserves more actively and therefore obtain better returns.
Existing issues of Exchange Fund paper, which are already backed by foreign reserves, will be rolled over as and when they mature.
China has spent hundreds of billions of dollars from its foreign reserves over the past year to support the value of the renminbi and to prevent it from weakening more drastically.
Capital flows from official sources, plus tapping foreign reserves, will help fill the gap in some countries, but in others, there will-of necessity-be sharp and abrupt macro adjustments.
Letting the RMB out as proposed above makes money for the country, and since China is already flooded with foreign reserves it would be easy to buy the RMB back if need be.
Turkey may also be heading for trouble. Its debt-service payments due in 2009 amount to 80% of its foreign reserves, the highest ratio of any big emerging economy.
The state in turn acts as the international recycling agent for those excess savings: it lends them to Western countries through its foreign reserves or through a sovereign-wealth fund.
