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Monday, 30 November 2009
Asia should look at own-currency reserves
Governments in Asia should continue to develop their domestic bond markets, the Asian Development Bank (ADB) argued during the fourth annual Asian Bond Markets Summit held in Singapore this week by the ADB and The Asset magazine.
The issue is becoming critical now because of the decline of the US dollar
By ANTHONY ROWLEY 26 November 2009
Governments in Asia should continue to develop their domestic bond markets, the Asian Development Bank (ADB) argued during the fourth annual Asian Bond Markets Summit held in Singapore this week by the ADB and The Asset magazine.
This is obviously true, although the most urgent imperative for developing these markets - to help avert future currency crises - seemed to go unstated, or at least understated.
The issue is critical now because of the decline of the US dollar and the need for current-account-surplus nations in Asia and elsewhere to have alternative currency instruments in which to invest their reserves. They should not be looking to the euro, or even gold, as an alternative to the dollar but to their own currencies.
This aspect of the story is not stressed enough by those pursuing the objective of bond market development at an official or private sector level. They tend to focus instead on the need for corporate borrowers to have access to local bond market financing and for institutional investors such as pension funds to secure local-currency assets.
As the US dollar declines (tracked by a parallel rise in the price of gold), the folly of relying so heavily as Asia does on the currency as a medium for reserves and payment transactions become more and more obvious. China, Asia’s biggest reserves holder, is acutely aware of this - as is Japan (the second biggest) although it does not say so publicly.
Other reserves-rich Asian nations are also feeling the pain of holding so many US dollars at a time when the need to revive US domestic demand threatens to keep dollar interest rates on the floor, causing the currency to decline even further. But not all governments appear to appreciate the fact that the solution to this dilemma lies largely within their own hands.
For more foreign exchange reserves to be deployed in Asian currencies, two basic things are required: the freeing up of residual exchange controls and harmonisation of tax treatment, etc, along with the creation of deeper and more liquid domestic bond markets.
No-one is going to hold reserves in a currency that cannot be freely traded and which does not have a suitable range of investment instruments available (such as government bonds and Treasury bills) in which to deploy funds.
This is only stating the obvious and yet the imperative to move more quickly on implementing such reforms to market structures - by means of concerted government action, if necessary - has never been greater than it is now.
Otherwise, Asia will be left dangerously unprepared as the US dollar continues its inevitable decline, along with the relative power and economic weight of the US in the world.
Asian governments have been able to neglect domestic bond market development up to now on the assumption that their domestic banking systems, plus emerging equity markets, would take care of domestic financing needs while export and reserve transactions could be conducted chiefly in US dollars (plus euro, to a more marginal extent).
All this assumed that the US would remain the global consumer of last resort and that the world would continue to be flooded with US dollars as a result. That assumption is now looking very flawed as dollar-based demand diminishes and, with it, the imperative to finance trade transactions in US dollars.
The incentive for holding dollar reserves will lessen but outside of the euro, there is little alternative to the dollar - as US officials like to point out when they argue that this fact provides a natural floor beneath the dollar. But there is an alternative if only governments in Asia are willing to take bond market development more seriously.
It is obviously preferable for reserves to be held in a diversified range of currencies (or a composite ‘basket’ of currencies) rather than keeping almost all eggs in a US dollar basket. The key to this is for authorities to agree first on special treatment (from a foreign exchange control and tax point of view) for long- and short-dated government bonds.
This will allow them to reduce their dependence upon US dollar holdings while also giving a significant boost to the development of public utility and corporate bond markets (by providing benchmark yields, etc). But to argue that this latter objective is primary, as some people do, is to miss the wider importance of bond market development.
If governments are in the fortunate position of not needing to raise funds in the bond market, they can follow Hong Kong’s example of issuing them anyway in order to build up fiscal reserves. This would mop up liquidity that otherwise might flow into asset bubble-creating speculation provided bond sale proceeds are put to good long-term use.
Once governments in this region get used to the idea of deploying reserves in one another’s bond markets and currencies, the incentive for greater monetary cooperation (and ultimately for a common Asian currency) will increase. Then we will have three global currencies which will aid reserve diversification even more.
Global financial imbalances look set to diminish in the future as the mercantile obsession with exports in Asia gives way to greater reliance upon domestic demand, and foreign exchange reserve holdings will diminish as a result. But this in no way weakens the argument for developing bond markets.
Snail’s pace
As demand patterns and global imbalances stabilise, so too should potentially disruptive international capital flows that arise from these imbalances. At that point, the need for domestic sources of capital (channelled either through the public or private sector) will increase, and bond markets will be an important medium for supplying it.
Asia tends to move at a snail’s pace on monetary innovations, as is the case with the inordinately long time that it is taking to get the network of official currency swaps known as the Chiang Mai Initiative fully up and running. If bond market developments are similarly allowed to drag on for years, a US dollar crisis may arrive first, and there will be no bailouts then.
2 comments:
Asia should look at own-currency reserves
The issue is becoming critical now because of the decline of the US dollar
By ANTHONY ROWLEY
26 November 2009
Governments in Asia should continue to develop their domestic bond markets, the Asian Development Bank (ADB) argued during the fourth annual Asian Bond Markets Summit held in Singapore this week by the ADB and The Asset magazine.
This is obviously true, although the most urgent imperative for developing these markets - to help avert future currency crises - seemed to go unstated, or at least understated.
The issue is critical now because of the decline of the US dollar and the need for current-account-surplus nations in Asia and elsewhere to have alternative currency instruments in which to invest their reserves. They should not be looking to the euro, or even gold, as an alternative to the dollar but to their own currencies.
This aspect of the story is not stressed enough by those pursuing the objective of bond market development at an official or private sector level. They tend to focus instead on the need for corporate borrowers to have access to local bond market financing and for institutional investors such as pension funds to secure local-currency assets.
As the US dollar declines (tracked by a parallel rise in the price of gold), the folly of relying so heavily as Asia does on the currency as a medium for reserves and payment transactions become more and more obvious. China, Asia’s biggest reserves holder, is acutely aware of this - as is Japan (the second biggest) although it does not say so publicly.
Other reserves-rich Asian nations are also feeling the pain of holding so many US dollars at a time when the need to revive US domestic demand threatens to keep dollar interest rates on the floor, causing the currency to decline even further. But not all governments appear to appreciate the fact that the solution to this dilemma lies largely within their own hands.
For more foreign exchange reserves to be deployed in Asian currencies, two basic things are required: the freeing up of residual exchange controls and harmonisation of tax treatment, etc, along with the creation of deeper and more liquid domestic bond markets.
No-one is going to hold reserves in a currency that cannot be freely traded and which does not have a suitable range of investment instruments available (such as government bonds and Treasury bills) in which to deploy funds.
This is only stating the obvious and yet the imperative to move more quickly on implementing such reforms to market structures - by means of concerted government action, if necessary - has never been greater than it is now.
Otherwise, Asia will be left dangerously unprepared as the US dollar continues its inevitable decline, along with the relative power and economic weight of the US in the world.
Asian governments have been able to neglect domestic bond market development up to now on the assumption that their domestic banking systems, plus emerging equity markets, would take care of domestic financing needs while export and reserve transactions could be conducted chiefly in US dollars (plus euro, to a more marginal extent).
All this assumed that the US would remain the global consumer of last resort and that the world would continue to be flooded with US dollars as a result. That assumption is now looking very flawed as dollar-based demand diminishes and, with it, the imperative to finance trade transactions in US dollars.
The incentive for holding dollar reserves will lessen but outside of the euro, there is little alternative to the dollar - as US officials like to point out when they argue that this fact provides a natural floor beneath the dollar. But there is an alternative if only governments in Asia are willing to take bond market development more seriously.
It is obviously preferable for reserves to be held in a diversified range of currencies (or a composite ‘basket’ of currencies) rather than keeping almost all eggs in a US dollar basket. The key to this is for authorities to agree first on special treatment (from a foreign exchange control and tax point of view) for long- and short-dated government bonds.
This will allow them to reduce their dependence upon US dollar holdings while also giving a significant boost to the development of public utility and corporate bond markets (by providing benchmark yields, etc). But to argue that this latter objective is primary, as some people do, is to miss the wider importance of bond market development.
If governments are in the fortunate position of not needing to raise funds in the bond market, they can follow Hong Kong’s example of issuing them anyway in order to build up fiscal reserves. This would mop up liquidity that otherwise might flow into asset bubble-creating speculation provided bond sale proceeds are put to good long-term use.
Once governments in this region get used to the idea of deploying reserves in one another’s bond markets and currencies, the incentive for greater monetary cooperation (and ultimately for a common Asian currency) will increase. Then we will have three global currencies which will aid reserve diversification even more.
Global financial imbalances look set to diminish in the future as the mercantile obsession with exports in Asia gives way to greater reliance upon domestic demand, and foreign exchange reserve holdings will diminish as a result. But this in no way weakens the argument for developing bond markets.
Snail’s pace
As demand patterns and global imbalances stabilise, so too should potentially disruptive international capital flows that arise from these imbalances. At that point, the need for domestic sources of capital (channelled either through the public or private sector) will increase, and bond markets will be an important medium for supplying it.
Asia tends to move at a snail’s pace on monetary innovations, as is the case with the inordinately long time that it is taking to get the network of official currency swaps known as the Chiang Mai Initiative fully up and running. If bond market developments are similarly allowed to drag on for years, a US dollar crisis may arrive first, and there will be no bailouts then.
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