East Asia re-considers foreign-exchange reserves

T
en years after the 1997/98 Asian financial crisis, the region is in a better economic state than ever before. According to the World Bank’s East Asia Update, which is published every six months, the share of the poor among the people in East and Southeast Asian countries has fallen from 50 % to 29 % since the crisis. Today, 552 million people in the region have to get by on less than two dollars a day – almost 230 million fewer than six years ago. Driven primarily by growth in China, the region’s GDP has risen to five billion dollars, twice as big as shortly before the crisis.

According to the World Bank, the former crisis countries have done almost everything right in the past ten years. However they are now facing new challenges, having to ensure they do not fall into the “middle income trap”, as the Bank puts it. Above all, the countries must manage to steer their growth along a sustainable and stable course (note Supachai Panitchpakdi’s comment on the future of the Asian Development Bank on page 219 of this D+C issue). China has to come to grips with serious environmental problems and social deficiencies. According to the World Bank, other emerging economies in the region, which did not grow as fast after the crisis as they did before, face the challenge of finding a viable economic strategy, particularly vis-à-vis their huge competitor China. The second important challenge the World Bank mentions is to curb the region’s growing inequality.

Since the financial crisis ten years ago, countries affected have amassed huge foreign-exchange reserves in order to be better prepared for sudden capital outflows or attacks on their currencies in future. Currently, forex reserves in East and Southeast Asia amount to more than $ 3 trillion; China, which has increased its reserves by almost 250 million dollars in the past year alone, accounts for over a third of the total sum. Experts largely agree that the reserves are now considerably higher than necessary for crisis prevention. Therefore, the discussion is turning on how to use them more profitably. So far, the reserves hardly yield returns, because they are predominantly invested in low-interest bonds with denominations in dollars, euros or yen. China has already announced plans to set up a state-run investment fund to handle parts of the country’s forex reserves more profitably. By doing so, the People’s Republic would follow the examples of Singapore and South Korea, where similar funds are already operational.

In addition, there are plans to invest more money in the region proper. At a meeting in Chiang Mai, Thailand, last month, East Asian finance ministers agreed to look into setting up a regional infrastructure-fund which would be fed by forex reserves. The ministers also decided to invest more money in regional bonds. (ell)