By Shamim Adam, Bloomberg
Chiangmai, Thailand: Southeast Asian nations and partners Japan, South Korea and China will pool part of an estimated $2.5 trillion of foreign currency reserves into a fund aimed at defending the region’s currencies in a financial crisis.
Finance and central bank officials from the 13 countries agreed to expand the so-called Chiang Mai Initiative, named after the Thai city in which the agreement was forged in 2000, from one dependent on bilateral currency swap agreements to a multilateral contract that will make it easier to bail out neighbours during any period of currency turmoil.
“We have the actual resources in a pool from only swap arrangements previously,” said Suparut Kawatkul, the Thai finance ministry’s permanent secretary, in Chiang Mai. “That will be more readily available where there is need from a country affected in a crisis.”
Members of the Association of Southeast Asian Nations are boosting financial integration and cooperation to broaden the group’s capital markets and improve monitoring and regulations. The efforts are aimed at preventing another financial crisis similar to the one in 1997 and 1998, which started with a devaluation of the Thai baht and spread throughout East Asia, plunging much of the region into recession.
Countries will manage their own reserves in the pool, with returns from investments going back to the individual members, Suparut told reporters. The amount of reserves to be pooled has not been decided, and a task force will determine details such as the size of the contributions and surveillance, he said.
Asian nations have more than $3.2 trillion of foreign currency holdings, more than 60 % of the global total. China’s swelled to more than $1 trillion last year, while Thailand, Indonesia and the Philippines have seen their reserves increase by over a fifth in 2006.
The accumulation of such assets is in excess of what those nations need for precautionary measures and there is little value in increasing the holdings, according to a study by US Treasury economists, Russell Green and Tom Torgerson released on 29 March.
“The idea that the largest reserve holders are holding foreign-exchange reserves exclusively for precautionary purposes appears difficult to support,” they said. “Most excess-reserve accumulation appears in countries with exchange rates closely tied to the US dollar, and the desire to limit exchange-rate flexibility likely underlies much of the recent reserve accumulation.”
Asia’s reserves are invested in US securities including Treasury notes and bills. Japan and China are the two largest holders of Treasuries. Korea and Taiwan are the fourth and fifth-biggest individual owners, while Hong Kong is eighth. The five markets have a combined $1.2 trillion of Treasuries, with more than half of the securities held outside the country.
The reserves pooling “reflects the theme to help member countries, protect themselves together, and use their resources within the region, instead of outside,” Suparut said.