Asia finance chiefs meet at ADB amid yuan talk
LONDON: Finance officials from Asia, which has two-thirds of the world’s foreign exchange reserves, meet next week as speculation reaches fever pitch about a Chinese currency revaluation that could rock global markets.
Asian finance ministers and central bank officials will attend the annual Asian Development Bank meeting in Istanbul to discuss the economic outlook, the risks they face and ways to prevent a repetition of the 1997/98 Asian financial crisis.
Asian central banks have more than $2.5 trillion of reserve assets, an arsenal that has grown rapidly in recent years as they intervened in markets to curb the export-damaging rise of their currencies against the falling dollar.
Participants include Japanese Finance Minister Sadakazu Tanigaki, Bank of Japan governor Toshihiko Fukui, Chinese finance chief Jin Renqing and his Indian counterpart Palaniappan Chidambaram. From Europe, Dutch Finance Minister Gerrit Zalm and his Belgian counterpart Didier Reynders join the meeting.
“There will be some discussion on China’s peg and the Europeans might bring it up. But so far Japan is less keen to push China, while the US and Europe take a harder stance,” said Mansoor Mohi-Uddin, chief currency strategist at UBS.
“If China moves Japan will face the pressure as the market will sell dollar/yen as it has been doing over the past week. The ADB meeting might put further pressure on dollar/Asia but the decision on the peg is ultimately up to (President) Hu Jintao and (premier) Wen Jiabao.” On Thursday, Japan’s top financial diplomat Hiroshi Watanabe said it was better for China to quickly switch to a more flexible exchange rate but that the move was up to Beijing. Ministers from the 10-member Association of South East Asian Nations plus China, Japan and South Korea (ASEAN+3) are also expected to meet on the sidelines of the conference.
A possible revaluation of the yuan was a topic of discussion when Asian policymakers and academics from ASEAN+3 met in Bangkok in February, according to the Korea Times. It was at the 2000 ADB meeting in Chiang Mai, Thailand, that ASEAN+3 decided to set up a network of hard-currency swaps - so called the Chiang Mai Initiative - to support to countries facing a speculative attack on their currencies.
“It is in their self interest that Asian economies which have some kind of dollar standard move to a more flexible regional arrangement,” said David Fernandez, head of Asian economic and sovereign credit research at JPMorgan in Singapore. “I am a big believer that we are on a path that will take us to cooperative monetary union in Asia.”
Less rough ride: The yen, often traded as a proxy for other Asian currencies, hit a two-month high versus the euro and a one-month peak against the dollar this week as comments from Chinese officials fanned speculation China would soon relax its rigid currency system.
China has come under international pressure to let the yuan rise to help correct global imbalances. Finance ministers of the Group of Seven rich nations have stressed the need for more exchange rate flexibility — a thinly veiled reference to China. “There won’t be open criticism towards China. The message for China will be milder (at the ADB) than at the G7, and China will have a less rough ride,” said Neil Parker, market strategist at Royal Bank of Scotland.
Earlier this year expectations were rife that Asian central banks were diversifying their reserves away from US assets into higher-yielding instruments. “The ADB has a bigger fish to fry, for example creating an Asian bond market. It is questionable how far they can go on this reserve issue, because the coordination of reserve management is very difficult,” said Marvin Barth, currency economist at Citigroup.
Asian bond market: ADB President Haruhiko Kuroda, a former top financial diplomat in Japan, told Reuters last week the bank wanted to issue its first yuan-denominated bonds this year as part of efforts to develop local bond markets.
The Manila-based ADB also wants to launch bonds denominated in the Philippine peso and Thai baht as soon as possible. The 1990s financial crisis taught Asia the danger of throwing open its doors to foreign capital when financial markets are underdeveloped and banking systems are weak. When the money abruptly flowed out, devaluation and recession ensued.
To reduce its vulnerability to fickle foreign capital flows, Asia is striving to build up local-currency bond markets and to reduce obstacles to cross-border portfolio investment. In December, Asian central banks launched a $2 billion fund to invest in local-currency bonds. Some academics say, however, Asian efforts to build a common bond market could spell trouble as long as governments cling to semi-fixed exchange rates. reuters
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