Joel, the best things come to those who waits, and while waiting, we must as well watch parallel experimental developments that will eventually impact USD recycling, currency reserve composition, and such arcane subjects:0)
biz.scmp.com
Tuesday, June 3, 2003
Asian central banks unite to avert a new financial crisis
ENOCH YIU and KIRSTI HASTINGS
Eleven Asian central banks are joining forces to establish a US$1 billion bond fund aimed at boosting regional debt market development and prevent a repeat of the 1997-98 Asian financial crisis.
The project will see regional central banks invest in US dollar debt issued by Asian governments as an alternative to the normal practice of exchange surpluses recycled into rich-world government debt, led by the United States.
The programme was a prototype for governments to invest far more of the region's combined US$1.2 trillion foreign-exchange surpluses in Asian sovereign debt, a source close to the Hong Kong Monetary Authority (HKMA) said.
Weak financial sector infrastructure was identified as a key failing in Asia's development track that led to inefficient allocation of capital and financial bubbles that resulted in ruined banking systems five years ago.
Hong Kong will contribute about US$100 million from its reserves to the fund, an amount similar to that which Japan, South Korea and Singapore will pay.
Australia has committed US$50 million while Thailand will give $120 million.
China, Malaysia, Indonesia, the Philippines and New Zealand did not disclose their input.
Debt market professionals welcomed the move but cautioned that insufficient high-quality foreign-currency debt had been issued to absorb a meaningful amount of Asia's vast surpluses.
Barclays Capital Asia economist Pieter Van Der Schaft said: "It might help central banks diversify their foreign-exchange holdings and will help Asian bond markets develop further."
The mechanism is aimed at increasing cross-border holdings of Asian bonds, providing Asian governments the comfort of natural buyers for their debt.
"It would allow access to capital even when there are severe strains on balance of payments," Mr Van Der Schaft said.
Asia's financial markets are characterised by high levels of liquidity stemming from strong trade surpluses but limited investment opportunities in high grade hard-currency debt. Outstanding Asian sovereign bond issuance stands at US$22.9 billion.
"The US$1 billion Asian Bond Fund to be launched is only symbolic and the first step for regional central banks to shift part of their huge $1.2 trillion foreign reserves back to the region," the HKMA source said.
"The second stage will be more important when all 11 central banks will be able to invest their reserves into local currency denominated bonds which are much larger markets than the US dollar bonds issued in Asia."
The fund will be managed by Bank for International Settlements, with funds allocated on the basis of a benchmark set by the 11 participating central banks.
About US$5 billion of sovereign bonds and debt issued by Asian government-backed agencies, not including Japan, Australia and New Zealand, will be eligible for investment. Thorny issues include the lack of a fully convertible currency or capital controls tying up funds within countries.
Commenting on China's non-convertible currency for capital account transactions, the HKMA source said mechanisms could be found to make the system work.
However, one debt market specialist, who asked not to be named, dubbed the fund initiative as little more than a public relations exercise.
"It's a bit of a political, bureaucratic idea", more aimed at fostering goodwill among Asian central banks than jump-starting the Asian bond market.
However, Ben Yuen, head of fixed-income at First State Investment, hailed the move as good news for Asian bond markets.
"It would create a positive image for outside investors if central banks were willing to put money in Asian sovereign debt," Mr Yuen said.
Bankers said rising US trade and budget deficits, associated with a sharp weakening of the US dollar, had concentrated Asian central bankers minds on the need to diversify holdings of foreign-exchange reserves. |
