Some notes on China and ASEAN+3
We live in a truly global world. I am siting in a cosy motel in lovely Polish mountains (as always, great food, great atmosphere, nice weather, beautiful views), dressed in pants bought on a Russian market in Phnom Pehn, Cambodia and jumper bought few years earlier in San Francisco, from Indian shop and I am checking eamails and RSSes from all over the world. One just came from Emerging Markets newswire, on China. Some truly interesting notes. See below:
“The Chinese consumer has embraced A-shares: funds under management in the Chinese fund management sector leapt 83% in 2006 and crossed the RMB1 trillion-mark in January, according to Z-Ben Advisors, the Shanghai-based asset management research group. Almost all of the increase was in domestic equity products. “This trend has a profound impact on altering the industry landscape in China’s financial sector,” says Dorris Chen, analyst at BNP Paribas Peregrine in Shanghai.”
“Chen believes it works to the benefit of large banks and insurers. “Large banks will see easing of concerns about excess liquidity,” because the pressures of that liquidity are mitigated when a bullish stock market allows them to channel excess deposits away from the banking system and into the stock market. “
“In a crowded field – there are 55 fund managers of one kind or another in mainland China, according to Z-Ben – the three bank-controlled joint ventures (JV) (for ICBC, Bank of Communications and CCB) underwent what Z-Ben principal Peter Alexander calls “a triumphant rise” in 2006.”
“At Bosera, another of the country’s biggest asset managers, president Xiao Feng thinks the opportunity is plenty big enough for everyone. “In the next five years, the assets under management of the mutual fund industry will increase by another 50%,” he says. “When the whole industry is growing more and more, companies will have the opportunity to grow their assets.””
“Asean+3 finance ministers will today announce a decision to multilateralise the management of the Chiang Mai Initiative (CMI), a $75 billion network of bilateral currency swaps created seven years ago to help ward off regional currency crises.”
““In five, ten or 15 years time the financial and economic situation in Asia may be different.” If the Asean+3 finance ministers improve the Chiang Mai Initiative safety net, “that would mark significant progress toward financial safety in the long run”, the ADB president said.
“Multilateralising the CMI would be significant progress over a network of bilateral arrangements,” added Kuroda. But he emphasised that this would not turn the CMI into an “Asian Monetary Fund”.
Kuroda, a former deputy finance minister for international affairs in Japan, is often credited with devising the original plan for an Asian Monetary Fund at the time of the regional currency crisis in 1997. That was dropped in the face of strong opposition at the time, from then US Treasury secretary Lawrence Summers and from the IMF.
The CMI was launched three years later by Asean+3 finance ministers at the ADB meeting in the Thai resort of China Mai. The network of bilateral swaps was designed to provide emergency financial liquidity for Asian countries hit by balance of payments crises, although it has never been invoked.
Finance minister Kwon of Korea had a trilateral meeting in Kyoto yesterday with his counterparts Koji Omi of Japan and Jin Renqing of China, and afterwards issued a statement welcoming “progress of the study toward an advanced framework of regional liquidity support arrangement” under the CMI.
“We agreed further to strengthen our efforts to explore ways for multilateralisation of the CMI, while confirming our commitment to maintain the two core objectives of addressing short-term liquidity difficulties in the region and supplementing existing international arrangements,” they said.
The ministers also agreed to promote other means of cooperation and “regional financial solidarity” through the Asean+3 finance ministers’ process.
ADB president Kuroda said in his interview that the report by a group of Eminent Persons on the future of the ADB, which he commissioned last year, had been generally well received by shareholders.
“I have talked to finance ministers and senior officials since the report was released [one month ago] and almost all of them have a positive view it,” he said. He welcomed the group’s “clear analysis” of poverty and other challenges facing the institution.”
- Summers comments:
“Former US Treasury Secretary Lawrence Summers warned yesterday that emerging Asian economies face stagnation if policymakers continue to focus on insulating their financial systems at the expense of deeper economic reforms.
In an exclusive interview with Emerging Markets, Summers said that the same problems that confronted Japan in the 1990s await much of Asia, as finance chiefs concentrate on the symptoms of past financial crises at the expense of addressing the underlying causes.
“The concerns now are less about a repeat of the 1997 Asia crisis, and more about the kind of failing that Japan experienced throughout the 1990s, where the aftermath of a period of easy money and reserve accumulation directed at exchange rate objectives proves to be the unearthing of weaknesses in the financial system and significant deflation,” he said.
“The risk of the sort of crisis that befell Thailand, Korea, or to a lesser extent Indonesia has been hugely attenuated by events, principally by the tremendous accumulation of reserves,” Summers added.
The erstwhile Harvard president argued that carefully sequenced financial liberalization, financial sector reform, and the reduced use of exchange rate targeting in Asia are crucial to guard against vulnerability.”
“The IIF will today present its Asia regional overview, which will show that, although capital flows to Asia (ex-Japan) are likely to moderate in 2007, from a peak of $255 billion in 2006, foreign exchange reserves will continue to rise to around $1.9 trillion this year.
The surge in credit available through hedge funds and the use of derivative instruments makes financial market performance more difficult to assess as the cycle turns, but Gregory Fager, director of the IIF’s Asia-Pacific department, emphasized that the situation was “vastly different” from 10 years ago, and a serious economic shock resulting from the withdrawal of foreign capital flows looked “out of the question.””
- JAPAN and KOREA also move ahead to create SWF
“Plans to set up a state-run investment company to manage Japan’s foreign exchange reserves are moving forward, a key economic adviser to Japanese prime minister Shinzo Abe said last night.
“Some people are advocating [such an agency] for Japan, and I am one of them”, Takatoshi Ito, one of a group of economic advisers to Japanese prime minister Shinzo Abe told Emerging Markets in an interview.
“Japan is accumulating reserves well beyond the size of what is required under regular circumstances to be held in liquid form,” he said.
Moves in Japan towards using an investment company to manage the reserves mirror similar discussions in Taiwan. Korea already has such an agency, and China is now setting one up.
The bodies will be modeled along the lines of Singapore’s state-run agency, Temasek, and the Singapore Government Investment Corporation (GIC).
All told, there are more than $3 trillion of reserves in Asia the management of which could be reviewed. The issue is very political in Japan, because of its close ties with the US and its reluctance to hint in any way at a significant shift of its reserves, which are nearly $1 trillion, out of US Treasury securities.
Korean finance minister Okyu Kwon told Emerging Markets in an interview yesterday that the country’s reserve management agency, the Korea Investment Corporation (KIC), should be fully operational by the end of this year and managing around $20 billion out of Korea’s $240 billion of official reserves.
“We need to increase the amount and diversify, not only for maintaining stability but also for profit,” he added.
George Chou, a deputy governor of Taiwan’s central bank, told parliament recently that the bank is evaluating foreign experience on managing the reserves via an investment company. “
Late addition: Asia Times online article on Asian Monetary Fund.