In emerging Asia, Forex reserves build confidence<\/p>\n
Isabel Reynolds, Reuters, Tokyo<\/p>\n
The huge foreign exchange reserves built up in Asia may
\neventually find more productive uses, but for now, after the
\n1997\/98 currency crisis, many countries simply value the
\nguarantee they provide, analysts said.<\/p>\n
China, whose reserves totaled just over US$200 billion at the
\nend of October, holds the second-largest pool in the world after
\nJapan, or third-largest if the euro-zone countries are taken as a
\nbloc.<\/p>\n
Other Asian countries, such as Taiwan and South Korea, have
\nbuilt up foreign assets of more than $100 billion each.<\/p>\n
Behind the build-up lies lingering unease over financial
\nstability following the Asian crisis of 1997\/98, since a deep
\npool of reserves can be a valuable asset in maintaining a
\ncountry's credibility among foreign investors.<\/p>\n
\"Especially with emerging market currencies, the issue of
\ncredibility...is important in terms of encouraging people to buy
\nyour assets,\" said James Malcolm, currency analyst at JP Morgan.<\/p>\n
But Junichi Mori, research manager at the Institute for
\nInternational Monetary Affairs (IIMA) in Tokyo, expressed doubts
\nabout the usefulness of small countries holding very large
\namounts of reserves.<\/p>\n
\"For example, South Korea's reserves are building up very
\nrapidly, though its economy is very small compared to that of
\nJapan. Perhaps there is a more efficient way of using that
\nmoney,\" he said.<\/p>\n
However, transferring reserves back into the home currency is
\nseen as impossible for exporting nations, because of the
\nundesirable effect on exchange rates.<\/p>\n
China's reserves could also be put to more effective use, said
\nSuiyo Li, an economist at Nomura Research Institute.<\/p>\n
\"Reserves built up partly because of the positive balance of
\ntrade, but also because foreign direct investment (FDI) into
\nChina has increased in the last couple of years,\" Li said.<\/p>\n
Last year's total FDI into China came to $40.8 billion and an
\neven larger total is expected this year.<\/p>\n
\"It would really be better if the money was not just sitting
\nthere, but flowing through the economy, helping development,\" she
\nsaid.<\/p>\n
IIMA's Mori suggests the credibility effect of large forex
\nreserves would be more efficiently achieved through agreements
\nbetween Asian countries to support one another's currencies in
\ntimes of crisis.<\/p>\n
Several bilateral currency swap deals have been agreed between
\nvarious Asian nations under the Chiang Mai Initiative, named
\nafter the northern Thai resort where it was agreed by finance
\nministers from 13 Asian countries last year.<\/p>\n
One rule of thumb indicates that holding enough foreign
\ncurrency to cover three months' imports is sufficient. China
\ncurrently holds enough for around ten months, according to Li.<\/p>\n
But she said China was in a delicate position, having yet to
\nfind out how its membership of the World Trade Organization from
\nthis month would affect its currency, currently traded in a very
\nnarrow band around 8.28 yuan to the dollar<\/p>\n
\"I think they will use the money in a more efficient way in
\nthe future, but they are uneasy at the moment. They are retaining
\nthe funds so as to be able to intervene,\" said Li.<\/p>\n
She believes China's reserves will continue to grow, although
\nthe pace will slow as falling world growth hits its export
\nmarkets over the next year at least.<\/p>\n
In the meantime, China is at least moving to diversify its
\nreserves holding, unlike Japan, whose reserves of $403.880
\nbillion at the end of November are largely held in dollars.<\/p>\n
Although currency breakdowns are considered a state secret in
\nChina, Li estimates from the make-up of China's foreign debt that
\naround 70 percent of its reserves are held in dollars, about 15-
\n16 percent in Japanese yen and roughly five percent in euros.<\/p>\n
On November 20, China announced it had raised the proportion
\nof euros in its reserves and would continue to buy euros.<\/p>\n
In the 1980s, the picture was very different, with around 50
\npercent of the total being held in yen, as China often issued
\nbonds in the Japanese currency. Only 26-27 percent was in dollars
\nat that time, according to Li's estimate.<\/p>",
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