Asian Currency Unit - Needs To Take Off
Rebalances Economic Power To Asian Economies
China has just overtaken Japan as the world's largest holder of foreign exchange reserves with US$853.7 billion at the end of February. China's reserves rose a sharp US$26.3 billion in January to 845.2 billion dollars, then added another US$8.5 billion in February. Japan's reserves at end of February stood at US$850.06 billion. China's foreign exchange reserves have grown remarkably in recent years - more than doubling from US$403.3 billion in 2003, thanks to strong fund inflows and a burgeoning trade surplus. This news comes at a time when plans to launch an Asian Currency unit (ACU) to help develop regional bond markets and promote regional monetary cooperation seems to be stalling.
The plan to launch the ACU is an important step to wrest some economic power to the Asian side. Of course the ACU will never be a a public currency like the Euro, but it is crucial to develop a substantive bond market based on the ACU. Right now, when you have billions of surplus cash in your central banks, you can either invest in bonds denominated largely in US dollars. Even soft loans to third world countries or those issued by IMF/World Bank are usually in US dollars. If you read my blog on the domination and reserve currency status of the dollar, you will appreciate that we need to diversify from that. Having a deep ACU bond market will bring prominence to Asian currencies and finances.
Right now, the members involved are quibbling over two things: the weighting of their respective currencies; and the inclusion/exclusion of some currencies. The weighting issue is a simple one, and should be easily resolved once the egos are set aside. It should be based on either a trade weigted index or GDP formula.
The tougher issue is determining who is in and who is out. Taiwan, though should be in, will definitely be out because you need China's yuan to be involved. HK dollars should be in, but will not be owing to its linkage to China (plus its a fully pegged currency anyway, get over it already). Difficult regime such as Cambodia should not be in, but will keep trying via the Asean route. Brunei should be in, even though it is small, plus it is already part of Asean. So, Cambodia is the sticky icky one. The ACU is supposed to be the Asean nations plus the big 3, which include Japan, China and South Korea. Wonder why India isn't included?
The ACU will allow for big bond issues to be distributed and traded. It will foster a new asset class in terms of Asian currency bond exposure and will excite big bond funds. The volatility of certain currencies will only add curry to the flavour. If it is big and deep enough, certain Euro central bankers and certain Asian countries may be able to diversify their portfolio of excess cash into ACUs. The ACU will generate even more excitement with respect to single Asian country currency bonds. For example a company or a country could issue a dual bond, 5 billion ACU (hypothetically) at 4% and a RM5 billion at 6%, thus allowing some diversification, risk management, exposure assessment of usage of funds, etc... If a smaller Asian country's currency is under "attack", the country may choose to borrow in ACUs instead of a more dominant or prohibitive US dollar, or as an option to a higher-cost Euro bond.
The main benefit in my view will be the "more intimate cooperation and consultation" on monetary and fiscal policies of member countries in the ACU. Strength in numbers. Keep us seperate, each Asian country is much weaker.