Countries in Asia are coming together and are pulling funds to strengthen regional investment in an effort to move away from the US dollar. The dollar is currently the dominant reserve asset and threatens to erode returns for Asia's stockpile.
By Shamim Adam
May 2, 2011 9:01 AM MT
Asian nations are pooling funds to strengthen regional investment, in a step toward diversifying record foreign-exchange holdings as the U.S. dollar declines.
Ten Southeast Asian nations, along with China, Japan and South Korea, plan to discuss an infrastructure fund to boost investment in roads, ports and utilities at a meeting of finance officials starting today in Hanoi. Policy makers have agreed to look for “new avenues” for reserves, the Philippine central bank chief said last month, urging greater use of China’s yuan.
More than a decade after the 1997-98 Asian crisis depleted reserves and forced countries from Indonesia to South Korea to seek bailouts, the region’s holdings have risen to about $6 trillion, half held by China. With the dollar remaining the dominant reserve asset, the currency’s decline threatens to erode returns on Asia’s stockpile.
“Asia needs to use its reserves more productively regardless of whether it is to set up financial safety nets or to invest more,” said Rajat Nag, managing director of the Asian Development Bank, which holds its annual meeting May 3-6 in Hanoi. “We are long gone passed that situation in the late ‘90s, and Asian countries need to make more aggressive investments with their reserves, including in infrastructure.”
The Dollar Index had a fifth monthly loss in April. The gauge, which tracks the dollar against the currencies of six major U.S. trading partners, fell 3.9 percent last month and is down 7.4 percent this year.
“There is a cost to having an overly large stock of foreign exchange,” Philip Schellekens, a senior economist at the World Bank, said in an interview in Kuala Lumpur last week. “It doesn’t earn you a lot of money to hold liquid forms of foreign currency. There are better ways to invest those.”
Schellekens added that the accumulation of reserves is in excess of what nations need for precautionary measures. Countries such as China should deploy its reserves for domestic purposes such as education and health care, he said.
Asia’s reserves are a product of export earnings, capital inflows and efforts to limit gains in currencies across the region. China has kept the yuan’s advance to about 5 percent versus the dollar in the past year.
U.S. and European policy makers have called on Asia to embrace stronger exchange rates to help rebalance global growth. Group of 20 policy makers in February listed public debt and fiscal deficits, private debt and savings rates, trade balances and net investment-income flows and transfers as criteria to use as yardsticks for when dangerous world imbalances are developing.
Foreign-exchange reserves were omitted at the behest of China, which held more than $3 trillion of the assets at the end of March.
China’s foreign-exchange reserves have exceeded a “reasonable” level and the management and diversification of the holdings should be improved, central bank Governor Zhou Xiaochuan said April 18. China Investment Corp., the country’s sovereign wealth fund, will receive $100 billion to $200 billion from the government, the Financial Times said last month.
While facing similar challenges, Asian countries have so far shown little appetite for regional coordination, with a number pursuing individual efforts to restrict inflows of speculative capital. South Korea has implemented tax measures, while Indonesia has required overseas investors to hold some securities for set periods.
Cooperation remains a goal: among steps planned is a $700 million Credit Guarantee and Investment Facility that will back local-currency denominated bonds issued by companies in the region. The aim is to make it easier for firms to issue such debt with longer maturities, according to the ADB, a Manila- based development lender.
Southeast Asian nations, along with the Asian Development Bank, are now setting up a $485.2 million fund to invest in infrastructure, the region’s finance ministers said in April.
Association of Southeast Asian nations insurance officials are exploring risk financing options and mechanisms that can be developed as part of the regional framework for disaster management and disaster risk reduction, the ministers said.
In March 2010, a $120 billion pool of reserves by the group of 13 Asian nations came into effect, designed to provide members with support through currency-swap transactions in times of liquidity shortages. The facility, a broadening of an earlier framework consisting bilateral swaps, hasn’t been used.
During the 2009 credit crunch, Asian nations such as Indonesia choose to seek help from its neighbors instead of borrowing from the International Monetary Fund, which led the bailouts of the late 1990s. Indonesia raised $5.5 billion in standby loans from the ADB, World Bank, Australia and Japan. It also increased the size of currency-swap arrangements with China and Japan to bolster access to foreign exchange.
Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch, said officials must also focus on faster integration between their economies.
“Setting up such regional funds is another line of defense when crises happen as most of them already have quite reserves which they will tap on first,” he said. “The immediate steps should be to focus on how to improve on trade and financial integration.”
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