Massive reserves leave little room for irony

PUBLISHED : Friday, 16 October, 1998, 12:00am
UPDATED : Friday, 16 October, 1998, 12:00am

The chief of the Hong Kong Monetary Authority, Joseph Yam Chi-kwong, says it is ironic that Asia should suffer a capital crunch while the five countries with the world's largest foreign reserves are all Asian.

He's right about the size of those foreign reserves. Japan, the mainland, Taiwan, Hong Kong and Singapore together had reserves of US$620 billion at the end of last year. Tiny Singapore with 200 square miles of land area had foreign reserves greater than those of the United States.

But he's wrong about the Asian financial crisis being ironic in that case. He should read up on the tactics of Alexander the Great, a successful Greek barbarian chieftain who held that you attack your enemy where he has posted his strongest forces because that's where he actually thinks he's weakest. A few old works of Chinese military strategy say the same thing.

These big reserves are a sign of weakness, not strength. They indicate that the countries which maintain them know that the structure of their currencies and capital flows are highly vulnerable to foreign pressure and therefore seek to protect them by building up big walls of reserves.

The United States is not worried about this sort of thing. Its reserves of US$72 billion amount to only 0.2 per cent of its gross domestic product. Its policy makers are happy to let the dollar go where it will in the sure knowledge that the strains on the balance of payments are self-adjusting and will take care of themselves with no help from foreign reserves.

But that's not the mainland with a closed capital account and a tightly controlled currency or Hong Kong which in 1983 adopted another self-adjusting system - the currency board - but which now increasingly looks to its reserves to keep its dollar peg at HK$7.80.

It's not Singapore where the currency has always strictly obeyed the marching orders of the Monetary Authority of Singapore. It's not Japan or Taiwan whose governments employ a heavy dose of administrative guidance to capital flows.

When policy makers in these countries boast of their big reserves they have in mind the experience of Thailand which thought that US$35 billion in reserves was sufficient defence for a rigged currency and discovered to its horror that its attackers were backed by trillions.

These policy makers are actually running scared.

And well they should be.

The Asian financial crisis would never have been so great if governments had not tried to forestall it with big reserves. Look at the countries of the Indian sub-continent which, rather than building up reserves, let their currencies give way under international pressure. They have not suffered as East Asia has suffered.

Perhaps some of the remaining big wall enthusiasts will be able to keep their walls unbreached. The odds are that Hong Kong and the mainland will be able to do it.

But Mr Yam is still wrong.

It's not ironic at all. A financial crisis is actually fitting justice for governments which think that big reserves allow them to fiddle with their economies.


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