Outside of the U.S. Federal Reserve, the lack of a central support for Asia's financial system has become apparent over the past few weeks. Late last week East Asian nations pledged to create an $80 billion foreign exchange reserves pool by mid-2009 to fight the global financial crisis and to launch a regional surveillance agency. Under the deal, any of the signatory nations—which include China, Japan and South Korea—would have access to foreign exchange reserves of at least $80 billion in the event of a financial emergency. The group includes the Association of South East Asian Nations (ASEAN), which is formed by Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. The plan will also establish an independent body to watch over regional markets. Reportedly, the fund will be authorized to defend regional currencies and may also cover domestic liquidity crunches.
Meanwhile this week, South Korea turned for the first time to the U.S. Federal Reserve for help in resolving a dollar funding crisis that arose partly because of the lack of a well-developed bond market. The Fed is seeking to stem the credit crunch and restore demand for commercial paper, the short-term borrowing that companies use to finance daily operations. The Fed began buying the debt directly from companies this week and the state-owned Korea Development Bank said it would sell up to $830 million in three-month bonds to the Federal Reserve. Steps have also been taken to open the way for Korea’s large commercial banks to receive the Fed’s permission to directly sell short-dated bonds.
The moves may help ease concerns about the capacity of Korean banks to raise dollars amid the global credit crunch that has increased the cost of funding. The Korean government has already vowed to guarantee as much as $100 billion of the overseas debt of local banks to ease a liquidity squeeze. However, the fact that Korean banks have turned to the Federal Reserve to resolve the funding crisis, even though regional Asian governments collectively hold over US$4 trillion in foreign exchange reserves—much in U.S. dollars—suggests that Asia has been slow to build up its own financial system architecture. Nevertheless, the new East Asia foreign exchange reserves pool is a first, if somewhat tentative, step in the right direction. And it at least demonstrates the willingness of governments to work together and support the financial systems should they unexpectedly deteriorate.
China’s role will be particularly important, given that it has the largest reserves by far. In the meantime, China has pressed ahead with the reform of its domestic financial institutions by announcing a plan to restructure the Agricultural Bank of China, with a view to an eventual listing. The restructuring will include a capital injection of US$19 billion and the selling of US$120 billion of non-performing loans to a fund set up jointly by the bank and the Ministry of Finance.
In broad terms, therefore, we continue to see Asian nations strengthening their own internal financial systems while also perhaps sowing the seeds of greater institutional cooperation within the region. These changes, along with development of local bond markets, may one day lead to greater financial independence for the region. For now, however, Asia still seems to be dependent on the Federal Reserve.
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The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews does not accept any liability for losses either direct or consequential caused by the use of this information.
