This was published on pages A1 and A7 of the 03 October 2003 edition of the Asian Wall Street Journal.

Can Asia have its own Euro?: Ideas of a Common Currency becomes more than Academic
by Rebecca Buckman and Jason Singer

Since several Asian currencies stumbled badly six years ago, throwing the region into a sharp recession, countries have been looking for ways to band together to make sure it doesn’t happen again. The issue has reared its head again in the past two weeks, as a sharp rise in the value of the Japanese yen against the dollar roiled economies from Seoul to Sydney.

One solution is now getting some renewed attention: giving Asia its own unified currency, akin to Europe’s successful euro.

The idea of creating a common Asian currency, or at least a regional “trading currency” for bonds that could serve as a precursor to actual monetary union, has been bandied about by academics for years. The idea remains highly controversial, and some skeptics say it could never happen, given the huge differences between Asia’s very diverse economies.

Yet recent moves by Asian governments and international financial institutions to create a more unified bond market in Asia are raising hopes that some sort of monetary convergence could eventually get off the ground though even proponents concede Asia has a long way to go. Europe, they note, had been moving toward stitching together its economies since the Treaty of Rome in 1957.

“We have to do it step by step,” says Masato Miyachi, a senior adviser for the Asian Development Bank in Manila. Though he says a common Asian currency remains “an ideal,” Mr. Miyachi supports current efforts to strengthen Asian bond markets and cut out the red tape that now prevents investors from buying bonds across borders. Buying bonds in one common currency, of course, would make things even easier.

Mr. Mlyachi is also a fan of the ideas of University of Tokyo professor Takatoshi Ito, a former Japanese government official who has long argued for stronger Asian bond markets and less reliance on financing from banks. To accomplish that goal, Mr. Ito wants to create an Asian bond corporation to buy local-currency debt from countries such as Japan, South Korea and Thailand. The new entity would then issue bonds denominated in a new so called basket currency, an artificial, trading currency based on the value of a weighted average of the currencies in the basket, such as the yen and the baht.

Because it is backed by government bonds, such a fund would establish a market price for the combination of the currencies. That could serve as a benchmark to allow companies in the region to easily raise money in neighboring countries, such as a Japanese auto maker issuing bonds in baht to finance operations in Thailand. Doing that would help remove foreign-exchange risk for the issuing company. Eventually, bonds could be issued in the basket currency, opening a much wider market of investors because buyers may be attracted in Thailand, Japan and elsewhere to the securities without worrying too much about currency risk.

Mr. Ito, who was Japan’s deputy vice-minister for international affairs for two years, got involved in the issue after witnessing the ravages of the 1997-98 Asian financial crisis. Then, the region’s reliance on the dollar for financing activities proved devastating when some Asian currencies plummeted in value, making it impossible for many companies to pay back dollar denominated bank loans. Mr. Ito’s solution: copy Europe, which started creating an integrated bond market in the 1980s based on the European currency unit. The ECU was a “synthetic” currency used only by financial institutions, but it wound up serving as a precursor to today’s euro, now the common currency of 12 of the European Union’s 15 member states.

But the notion of linking Asia’s bond markets, most of which are still tiny and underdeveloped, largely met with yawns in Asia. “Nobody wanted to push the issue,” Mr. Ito says. “It was an academic issue.”
Lately, though, Mr. Ito’s ideas are looking more relevant. Asia’s governments currently are holding $1.7 trillion in foreign reserves, mainly in U.S. dollars. Though Asian governments don’t mind buying dollars to keep their currencies weak, which helps boost their countries’ exports, they are mindful of the fact that their huge reserves essentially finance America’s huge trade deficit. The situation also leaves Asia vulnerable to the same risks that hobbled the region six years ago, mainly too much reliance on U.S. dollars. Stronger local or regional bond markets could suck up some of the cash now going into big reserve accounts.

In addition, a single Asian currency could make it cheaper and easier for U.S. and European firms to produce and trade goods in the region. That could reshape the way the world does business even faster than is already happening. Electronic toys could be made in China using computer chips manufactured in Taiwan, and switches crafted in South Korea, more efficiently and with less financial risk if the countries were linked by a common currency. Though much of this trade now happens in dollars, individual companies still have to pay wages and cover other costs in their home currencies.

New politicians on the scene in Asia these days, including Thailand’s populist Prime Minister Thaksin Shinawatra, are also helping push the idea of an Asian currency. “Thaksin is giving this [idea] a kick in the pants,” says Marshall Mays, an economist and Hong Kong investment adviser. Mr. Mays recently helped create a nonprofit group called the Asian Bond Market Forum, backed by groups as diverse as the Chinese Academy of Social Sciences and the Milken Institute in the U.S. to promote the idea of stronger Asian bond markets and a common trading currency.

Indeed, Mr. Thaksin’s financial advisers.were key drivers of the new Asian Bond Fund, a vehicle created in June by 11 Asian countries to invest in U.S. dollar denominated assets. Local currency bonds should be next. In early September, Asian finance ministers met at the Thai beach resort of Phuket to discuss how to break down barriers to regional bond trading, such as different clearing, settlement and bankruptcy laws between nations. Easing such barriers would in many ways lay the groundwork for fuller monetary cooperation.

Right now, “there are very basic impediments” to linking bond markets in Asia, says Barclays Capital analyst Dominique Dwor-Frecaut in a recent report. Markets are so small that traders don’t even have timely or accessible data on bond prices. Asia also needs some sort of regional credit agency, she says, to judge the creditworthiness of bond issues and help investors make better decisions.

While, she says that “regional financial integration may well require the creation of a regional currency market,” Ms. Dwor Frecaut also believes that bond markets could be strengthened without a new currency. Indeed, many economists believe the idea of a common Asian currency remains far fetched.

Jonathan Anderson, the chief AsiaPacific economist for Swiss investment bank UBS, calls the idea “a crock,” adding, “for the time being, it’s not going to happen.” Real monetary union requires tremendous coordination of countries’ fiscal and monetary policies, among other things.

Right now in Asia, by contrast, “we’ve got per capita incomes that range from $35,000 in Japan to under $1,000 in the poorest Asian economies, and everything in between.” Even so, Mr. Anderson says beefing up Asia’s underdeveloped bond markets would be a “worthy undertaking.”

Still, the process is slow. Many economists,were disappointed when the much-hyped Asian Bond Fund was launched this summer at a relatively small size - just $1 billion - and was authorized, initially, only to buy U.S. denominated debt. It was a fund “too small to matter in the only currency [countries] have enough currency in anyway,” says Mr. Mays, the Hong Kong investment adviser.

But it is a first step, Mr. Mays says. Japan’s Mr. Ito says he has been in monthly contact recently with financial officials in Japan, where he still sits on various Ministry of Finance committees, and in South Korea and Thailand to discuss his bond market ideas. Though authorities are hesitant to dive into his bond fund plan and still have disagreements about how it would work, the officials have started to reach a compromise, he says.

At the very least, “I think I have convinced at least Thai officials and Korean officials that this is a good idea,” Mr. Ito says.

  

Posted on October 3rd, 2003 by jl
Filed under: Intl Currency