China wants place at BIS dinners
May 27, 2005
With US$659 billion (HK$5.14 trillion) in foreign-exchange reserves, the People's Bank of China helps determine the fate of the world financial markets as it, along with other Asian central banks, buys US Treasury bonds and finances America's fiscal deficit, which was a record US$412.5 billion last year.
If the central government stopped buying American debt, it might trigger a surge in US interest rates and a collapse in housing, equity and bond markets, said New York University economist Nouriel Roubini.
Even so, the People's Bank of China does not have a seat on the board of the Bank for International Settlements in Basel, Switzerland, the place where central bankers from all over the world come together to confront threats to global markets.
Japan is the only Asian country with a seat on the board, and officials at the mainland central bank, which is a BIS member, say the situation does not reflect economic realities.
"The current structure of the board needs to change if the BIS wants to become a truly international institution,'' said He Jianxiong, deputy director-general of the international department of the People's Bank of China in Beijing. "Since East Asia holds about two-thirds of the world's foreign-exchange reserves, but only Japan is represented on the board, it could be a constraint on developing the BIS' relationship with East Asian countries.''
The BIS, added He, plays a very positive role in promoting cooperation among central banks.
The BIS, housed in an 18-story, bronze metallic, cylindrical tower, was set up in 1930 by the central banks of Belgium, France, Germany, Italy and Britain, with the participation of Japan and the United States, to administer Germany's World War I war reparations. It soon became an exclusive central bankers' club that operated out of public view. Until the 1970s, it was housed in a nondescript former hotel near the Basel train station.
Governors of the 55 central banks that are BIS members gather at BIS headquarters for bimonthly weekend meetings.
The highlight is a private Sunday night dinner for central bank governors from the countries represented on the board - Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, Britain and the United States - to discuss threats to financial stability and develop personal relationships that they need when a crisis hits.
The president of the Federal Reserve Bank of New York is also included in the Sunday dinner. ``We were all on a first-name basis and the atmosphere was very collegial,'' said Alan Blinder, former US Federal Reserve vice chairman who attended the dinners when Fed chairman Alan Greenspan could not. ``The discussions were very pragmatic. Because there were no staffers present, there was no gallery to play to.''
In the 1960s and early 1970s, most decisions about the international monetary system were made at the then monthly Sunday dinners, said Gianni Toniolo, a professor of economics at the University of Rome and Duke University in Durham, North Carolina.
The group's decisions included propping up the US dollar, the British pound and French franc when their countries threatened to break out of the Bretton Woods system of fixed exchange rates, as well as the creation of a gold pool in which eight central banks intervened together in the gold markets.
After the 1973 collapse of Bretton Woods, the system named after the New Hampshire town that hosted a 1944 conference that created the International Monetary Fund and the World Bank, the BIS focused primarily on global regulation and financial stability.
The BIS dinners helped build up the personal relationships and trust central bankers would count on when a financial crisis hit, said Gerald Corrigan, a Goldman Sachs managing director and former New York Fed president.
``The Sunday night dinners helped develop trust and a willingness to share ideas at times of stress,'' Corrigan said.
China should have a seat at the table during the dinners because of the global debate about whether it should revalue its currency - even if the issue will not be resolved at the BIS, Toniolo said.
``It would be useful, but this is a highly sensitive political matter which is certainly not for the BIS or the governors to decide,'' he said.
Although it was not set up to be a crisis manager, the BIS has helped bail out countries in financial turmoil as they tried to put together an IMF program. In
late 1998, the BIS agreed to provide as much as US$13.3 billion to Brazil, which was then suffering a loss of investor confidence following the Asian financial crisis.
The BIS also serves as an investment arm for central banks. Its banking department holds 6 percent of the world's foreign-exchange reserves, taking deposits from central banks and international financial institutions and investing them mainly in government securities and commercial bank assets.
In 2000, the BIS opened a trading room in Hong Kong to better serve Asian central banks, which accounted for almost half of BIS deposits last year.
The department squeezed a US$794 million profit from the bank's US$249 billion in assets in the year ended March 31, 2004. The BIS competes with private investment houses for central banks' reserve management business.
``We refer to ourselves as `the bank for central banks,' and we are, but in that market we are competing directly for central bank placements with the banks in the private sector,'' BIS general manager Malcolm Knight said.
Arturo Porzecanski, an economist at New York University and former head of emerging-markets research at ABN Amro in New York, criticized the BIS for one of its additional roles - serving as a haven for countries looking to protect their reserves from litigious creditors.
Argentina began transferring its foreign-exchange reserves to the BIS in October 2001, just two months before defaulting on US$95 billion of its debt, according to an Argentine central bank report. By the end of 2002, Argentina had US$6.1 billion at the BIS.
``The BIS is where deadbeat countries park money and thumb their nose at the international community,'' said Porzecanski.
Among the most pressing issues for the BIS is still the composition of its board and the need to reach out to Asian countries, said Andrew Crockett, president of New York-based JPMorgan Chase International in New York.
``I saw more need for the functions of the BIS in Asia,'' said Crockett, 62, who was BIS general manager from 1994 to 2003.
``You've got a lot of countries with separate currencies and the problem of coordinating monetary policy to achieve foreign-exchange stability in the region. I could see that function less important in a Europe with a single currency but still important in Asia.''
During his tenure, Crockett helped persuade the BIS board to extend membership to 13 emerging-market countries, including the mainland. The BIS' transformation still is not complete, said Nout Wellink, governor of the central bank of the Netherlands and chairman of the BIS.
``Knight is building on what Crockett set into motion,'' Wellink said. ``It is not new what he is creating now, but he's doing his utmost to continue the process of making the BIS a truly global institution.''
The BIS cannot afford to wait too long, Crockett said. ``There is a risk that maybe China will lose interest in any organization because it doesn't seem to be responsive to them,'' Crockett said. ``My belief is that any organization that doesn't acknowledge China's centrality is going to suffer more than China will.''
There's nothing to stop disgruntled Asian countries from setting up their own BIS. In the mid-1990s, Bernie Fraser, then the governor of the Reserve Bank of Australia, led a campaign to create an Asian BIS. That, Crockett said, helped persuade the BIS board to let Asian countries join the institution.
In 1994, Crockett helped persuade the board to include Canada, Japan and the United States as board members. In 1996, China, Hong Kong, India, Mexico, Russia, Saudi Arabia and Singapore joined the BIS.
By 2003, 15 additional countries, including Brazil, Chile, Indonesia, South Korea, the Philippines and Thailand, had joined. Crockett opened BIS offices in Hong Kong in 1998 and in Mexico City in 2002.
He left the BIS nine months before his second five-year term ended, with parts of the outreach agenda still incomplete. ``I wouldn't have had any objection to seeing the Hong Kong office grow much more rapidly than what was in fact the case, given the growing importance of Asia,'' Crockett said.
He also said he wanted to include some big emerging markets, particularly the mainland, on the BIS board.
Knight has taken an incremental approach to changing the BIS, slowly expanding Asian countries' involvement in BIS activities. In March, for example, he invited the mainland for the first time to take part in the thrice-yearly Markets Committee meeting, where the officials responsible for the market operations of BIS board members' central banks discuss developments in foreign-exchange markets.
That month, Knight asked China and India to join the bimonthly Committee on the Global Financial System, where central bankers discuss financial system vulnerabilities. ``The systemically important emerging-market countries have gained more voice in BIS meetings,'' Knight said.
The BIS is asset manager of the so-called Asian Bond Fund I, launched in 2003 to increase liquidity of local bond markets by creating benchmark debt issues.
It invests US$1 billion put up by 11 Asian central banks in US dollar bonds issued by their governments.
The BIS administers the US$2 billion Asian Bond Fund II, which invests in local currency Asian debt and is managed by private asset managers.
The BIS needs to do more, said the People's Bank of China's He. ``Although management is trying to strengthen relations, including setting up a regional office in Hong Kong and creating an Asian Consultative Council, it cannot be a substitute for representation on the board,'' He said.
The BIS board has discussed changing its composition on several occasions, BIS chairman Wellink says.
``The BIS is more than a meeting place, it is a bank,'' he said. ``I am not sure that in a bank you should have your biggest clients as board members, it shouldn't be taken for granted that clients should be board members.''
Another vexing issue is which other emerging markets should join the board along with the mainland, Crockett said. ``It is obvious China should be there,'' he said. ``But once you take China you open the Pandora's box of who else should take the other seats on the board.''
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