Will Asia central banks stock up on euros?

Will Asia central banks stock up on euros?

Ovais Subhani, Reuters, Singapore

Some Asian countries, which collectively have more than US$1 trillion in currency reserves, are showing flickers of interest in adding more euros to their stockpiles after last week's successful launch of euro notes and coins.

A Reuters survey of Asian central banks showed on Tuesday at least five countries had left open the possibility of bigger shares of euros, although they were all careful not to signal any plans.

This follows a high-profile pro-euro statement from China, the world's second biggest reserve holder with $208 billion.

The physical launch of the euro, three years after its electronic birth, in theory should not have a direct impact on reserves policy. But it has created an avalanche of publicity and interest.

This all comes as Asia, which has a history of currency volatility, has been steadily building up its holdings and enjoying a rare spell of currency stability over the past several months.

Aside from the fanfare of the launch, there are several reasons why central banks are thinking about the euro.

They include trade flows, debt market performance and risk management.

"The euro has tremendous potential as a major reserve currency," said Malaysia's central bank in a written response.

"This will occur with the greater use of the currency in trade settlement and as the European capital markets expand in the future."

Bank Negara Malaysia's comment was one of the strongest in the survey. Central banks are notoriously cagey about issues such as reserves or intervention.

Central banks also gave a mixed response to the idea of a fresh debate on Asian currency union in view of the euro's introduction.

The poll elicited responses from nine of 14 Asian central banks.

Japan is the world leader in reserves with latest data showing $404 billion. Both it and China declined to comment for the survey, but China's finance minister went on the record on Sunday saying he would recommend buying more euros as soon as possible.

Asia accounts for more than half of the $1.9 trillion in foreign reserves held around the world, so any sizable shift into the euro and out of the dollar or yen would have obvious effects on the markets.

While most central banks declined to detail their reserves breakdown, analysts estimate between 60 and 80 percent of Asian reserves are in dollars.

The yen and euro each make around five to 10 percent, they say. Those questioned ranged from Japan, with its mighty hoard, to Bangladesh, which has just $1.3 billion.

The Monetary Authority of Singapore (MAS), like most central banks, declined to spell out its intentions directly. But it did say it was taking a market-led approach.

"The euro, together with the U.S. dollar and other major currencies, constitutes a major part of MAS reserves," said the central bank, which as of November had $77 billion in the kitty.

"MAS's holdings of euro-denominated assets at any point in time will depend on the outlook for these assets relative to other markets and currencies," it said in a written response.

Thailand, with $33 billion, gave an indication that its reserves were dominated by dollars and yen. "One principle is that the currency breakdown of our reserves partly reflects Thailand's foreign debt repayment obligations including those due under the IMF bailout package," an official told Reuters.

The official did not rule out increasing the euro portion, saying it might happen if the euro gained popularity and appreciated.

On that front, the euro has a long way to go. At 0945 GMT (16.45 pm Jakarta time) it fetched $0.8899, down 25 percent from a $1.19 high the day it was born.

Still, it did strengthen in 2001, recovering from a life-time low of $0.8225 in December 2000.

Malaysia, with $31 billion, said part of its reserves had already been invested in the euro. It said this was in line with its portfolio diversification policy.

Pakistan, with just $4.9 billion, said a proposal to shift part of its reserves into euros was under consideration. Bangladesh said it might convert some sterling into euro.

Hong Kong, South Korea and Philippines expected no imminent change in reserve profiles. Taiwan gave no indication. India, Australia and Indonesia, like Japan and China, declined comment.

Chinese officials have pointed to growing trade with the euro zone, China's third largest trading partner in 2000 with volume of nearly $70 billion. Central banks of Pakistan and Bangladesh also cited trade as reasons to have more euros.

"Trade volume between Pakistan and the European region is expected to increase due to recently introduced trade concessions by the EU.

Thus, the euro's share in reserves would also proportionately increase," Pakistan's central bank told Reuters in a written response.

Lehman Brothers estimates euro zone exports from Asia excluding Japan rose to 14.2 percent of the total in the first half of 2000 from 9.2 percent in 1999 and 8.7 percent in 1995.

As central banks hold most of their foreign holdings in government bonds and other debt, they keep an eye on the performance of the debt markets they have invested in.

"The single currency has unified many developed government bond markets in Europe, which are within MAS' investment universe," Singapore's central bank said.

Australia, although it would not comment, happens to be one of the most transparent central banks when it comes to reserves.

The Reserve Bank of Australia has 40 percent of its reserve in dollars, and the yen and euro have shares of 30 percent each.

"These benchmark allocations are periodically reviewed to ensure that they still represent the optimal risk/return trade- off," RBI's annual report issued in August said.

However, few central bankers expect a replication of the euro's success story in Asia.

Singapore said it does not see a single Asian currency in the foreseeable future while South Korea said it was hard to expect such a development in a century.

In Taiwan, Chou A-ting, chief of the central bank's foreign exchange department, said: "The road towards integration is not impossible, but quite a long way to go."