Asia must clean house before changing currency systems

Asia must clean house before changing currency systems

TOKYO (AFP): Asia's ailing economies must clean house before
playing around with new currency systems, analysts said
yesterday, aiming their toughest barbs at Indonesia's plan for a
fixed rupiah.

"Sort the mess out first and then start working about these
things but don't do it the other way around," said Russell Jones,
chief economist at Lehman Brothers.

On Wednesday, the Indonesian government announced plans to
establish a currency board to stabilize the rupiah by maintaining
a fixed exchange rate with the dollar.

The previous day, Malaysian Finance Minister Anwar Ibrahim
told a news conference in Tokyo of plans to allow Southeast Asian
trade with Japan to be settled in yen through Japanese banks.

Malaysia has also proposed that trade with the Association of
Southeast Asian Nations (ASEAN) be settled where possible in
local currencies, although their value would still be measured
against the greenback.

While some analysts said the new currency proposals were the
first signs of an emerging Asian monetary system, most were
cautious, particularly in respect of Indonesia.

There was a tendency to see the currency board as a universal
panacea, said Jones, but "the reality is that it replaces
currency volatility with a system that is incredibly painful."

"Currency volatility was a symptom of a number of underlying
problems -- lack of transparency, cronyism, excessive liquidity
in the financial market -- these things still have to be solved,"
he said.

A fixed exchange rate placed the weight of any reaction to
adverse news on the domestic economy through interest rates, the
analyst said, warning of sharp and painful moves such as those
experienced by Hong Kong.

Moreover, fixed currencies depended largely on overseas
confidence that huge foreign exchange reserves were available to
defend the currency, as in Hong Kong's massive coffers which are
further backed by China's.

Malaysia's proposal for Asian trade to be settled in local
currencies pre-supposed a confidence in regional currencies that
did not yet exist, Jones said.

"Building a system around the Asian currencies is a pipe-dream
-- until they have put their houses in order and confidence has
been established."

Andrew Shipley, economist at Schroders Japan, said the
underlying problem was overcapacity in Asia.

"Anything which does not point to recovery in return on
assets... won't attract overseas capital and as a result their
currencies won't be stabilized, " he said.

But Richard Werner, chief economist at Jardine Fleming
Securities, said the Malaysian proposals reflected "the fact that
Asia has moved from being a dollar bloc to being something
different."

"In the end, the currencies will be trade-weighted," he said,
adding that such a trend would inevitably lead to greater
importance for the yen vis-a-vis the dollar.

"We are seeing the early stages of the creation of an Asian
monetary system."

Werner was more cautious, however, on Indonesia's plans for a
currency board, particularly if it was to tie the rupiah to the
dollar rather than a basket of currencies.

"Previously they were pegging themselves to the dollar. If it
is the dollar then they are just re-establishing the peg and
history will tell if that is going to work," he said.

The rupiah was allowed to fluctuate in a range of around 12
percent to the dollar until the trading band was abolished in
August amid speculative attacks.