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Exchange reserve to boost Asian confidence

By Yang Tao (China Daily)
Updated: 2009-05-11 07:42

Asian nations recently reached an initial agreement on the establishment of a foreign-exchange reserve pool by year-end to revive investor confidence as economies around the region falter amid the worst global economic recession since World War II.

Japan, Asia's largest economy, will contribute $38.4 billion, 32 percent of the total reserve while the Chinese mainland and Hong Kong together will add a matching amount. South Korea's share will be $19.2 billion, or 16 percent. The Southeast Asian nations will contribute 20 percent of the total amount. The regional contingency fund will be used in times of turmoil, according to the May 3 agreement. A surveillance unit is to be set up to identify risks to the region and provide oversight of the $120 billion foreign reserve fund.

Undoubtedly, the establishment of the first Asian foreign reserve pool in history will produce a range of positive effects on the flagging regional economy against the backdrop of the global economic recession.

The establishment of the fund is expected to improve the capability of Asian countries to tackle the ongoing crisis and contribute noticeably to financial stability in the region. With such a blood pool-alike reserve fund in the right place, timely financial assistance can be offered to any crisis-stricken economy and help it to survive a breakdown.

At the time of the Asian financial crisis in 1997, Asian countries had no choice but to turn to the International Monetary Fund (IMF) for financial support although the body prescribed a series of tough preconditions for assistance. The IMF, largely dominated by the US and other Western powers, arranged more than $100 billion of loans to hardest-hit countries - Thailand, Indonesia and South Korea - after their currencies collapsed during the crisis. In return, the three Asian nations were forced to cut spending, raise interest rates and sell state-owned companies. There is no doubt that the establishment of a financial blood pool of Asia's own will strengthen the capacity and enhance the efficiency of regional economies in handing a financial crisis.

The regional reserve fund is also expected to accelerate the Asian countries' movement towards financial integration and promotion of a mutually complementary and win-win financial climate. Since 2000, there has been sluggish progress made in promoting Asian financial cooperation, especially in the construction of the region's currency swap mechanism.

Thus, the setting up of the contingency reserve fund can serve as one evidence of the essential advance Asian members have made towards promoting the much-anticipated regional financial cooperation. It is also a reflection of Japan's positive attitude in this regard. In previous years, the largest Asian economy had adopted an ambiguous and negative stance on Asian financial cooperation.

The establishment of a foreign exchange reserve pool in Asia is also expected to promote reforms of international financial mechanisms, and increase Asian nations' voice in international financial institutions. With the acceleration of global integration and interchange in recent years, the world's economy has become more prone to a financial crisis. As the world's two major financial bodies, the IMF and the World Bank, however, have performed poorly in terms of offering economic aid to crisis-stricken countries. The creation of the Asian foreign reserve fund is thus expected to play a complementary role in the region.

Also, the reserve pool, as an elementary form of the Asian monetary fund, will increase Asian countries' financial independence in times of crisis and help them to take concerted action in the face of increasing international competition - a move that will raise the region's bargaining power in international negotiations.

Besides, the $120 billion fund will help strengthen Asian members' foreign reserve security. The injection of such an enormous amount into the regional reserve pool will increase Asian nations' fund management flexibility and boost their foreign reserve value provided a well-designed fund management and operation mechanism is set up. In addition, it will raise Asia's attractiveness to the outside world and maintain the region's economic vigor.

With the emergence of East European countries and other regions in recent years, Asian economies' attractiveness to foreign investors has been on the decline. The ongoing global crisis and the accelerated deleveraging trend in the US and European financial bodies have further contributed to some extent to capital outflow from Asian countries.

Thus, the establishment of the regional foreign reserve pool is of symbolic significance to investors, indicating the determination of Asian countries to maintain their financial stability.

The author Yang Tao is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences.