China, Japan, South Korea to pool forex reserves

China, Japan and South Korea have agreed to pool part of their foreign exchange reserves to prevent a repeat of the crisis that depleted Asia's holdings 10 years ago.

Finance ministers from the three countries will join 10 finance ministers from Southeast Asia in Kyoto tomorrow to discuss combining some of the region's foreign reserves, estimated at $2.7 trillion, in an effort to help central banks shield their currencies from unwelcome outflows of money.

Things are at a very early stage and the details haven't been set such as when and how the joint reserves of participating countries will be managed, South Korea's finance minister Kwon Okyu told reporters after today's meeting.

The current arrangement, introduced in 2000, only allows for country-to-country currency swaps.

Pooling the reserves would allow the region's governments, stung by conditions attached to loan packages by the International Monetary Fund (IMF) during the 1997-98 financial crisis, to reduce reliance on the Washington-based agency.

"You can't expect these things to explode overnight," said Robert Subbaraman, chief economist at Lehman Brothers Asia in Hong Kong adding that it will take time for the Asian nations to consolidate a regional financial system.

The unsuccessful defence of their plunging exchange rates a decade ago depleted the reserves of Indonesia, Thailand and South Korea, and prompted them to turn to the IMF to shore up their finances.

The IMF arranged over $100 billion of loans to the three Asian countries during the crisis after their currencies collapsed. In return, governments were forced to cut spending, raise interest rates and sell state-owned companies.

Critics said the policies deepened the region's recession, as higher borrowing costs hurt businesses and crimped domestic consumption. The IMF, in a 1999 assessment of its handling of the crisis, said it 'badly misgauged' the severity of the collapse and acknowledged its fiscal prescriptions for the three countries were too harsh.

The IMF's debtors couldn't wait to free themselves from the dictates as all three settled arrears years ahead of schedule. The fund prescribed Thailand the 'wrong medicine', former Prime Minister Thaksin Shinawatra said and asked citizens to fly the national flag on offices, homes and factories when it made the last of its payments in 2003.

After clearing loans from the fund in October, Indonesia's central bank governor Burhanuddin Abdullah said the country was no longer a sick member of the IMF. South Korea's last installment payment of $140 million in August 2001 was accompanied by comments from a government spokesman that it had retaken economic sovereignty and no longer needed prior consultations with the fund.

The region's holdings of foreign reserves have since swelled. China's foreign-currency holdings grew by $1 million a minute in the first quarter to $1.2 trillion, the most in the world. Japan's foreign exchange reserves have doubled since 2000 to $887.98 billion in March. South Korea's reserves are now the world's fifth-largest, surging to $244 billion from $7 billion in November 1997.

The three countries will also help aid the development of an Asian bond market, which would allow governments tap the region's $1.5 trillion of savings to find projects to build roads and power stations and improve sewage systems.

"We believe this collective work will facilitate the diversification of issuers and types of local currency-denominated bonds and this contribute to the deepening of local bond markets," today's statement said.

At present Asia's reserves are invested in the US bond market with investors from Japan, China, Korea, Taiwan and Hong Kong owning a combined $1.2 trillion of treasuries.

The Japanese finance minister Koji Omi said the meeting between the three nations, today on the sidelines of the annual gathering of the ADB reached a consensus that that both Asian and global economies are solid now, but that they will watch out for potential risks to growth including the US housing market and oil prices.