Asia is advised to diversify reserves out of US dollars
Regional central banks are reluctant as it could destabilise the American currency
Asian central banks should diversify out of US dollars to maximise the return on their foreign exchange reserves but dare not because they are too dependent on the United States.
That was the consensus at Euromoney's third Annual Asia Forex Forum yesterday in Shanghai which considered why China, Japan and other Asian countries invest a majority of their reserves in US dollar instruments, especially Treasury bonds, despite a low return and the likelihood that the dollar will continue to devalue.
Avinash Persaud, chairman of Intelligence Capital, said Asian central banks should follow the example of Temasek Holdings and Government Investment Corporation of Singapore, Norwegian Petroleum Fund and Abu Dhabi Development which invest state funds in a wide range of stocks and private equity ventures.
'The benchmark for investment should be long-term returns and not liquidity. It should be sovereign wealth management,' he said. Such a diversity of investment vehicles would give the central banks a higher rate of return and enable them to better use their reserves.
But the speakers said Asian countries were too dependent on the dollar and the US economy.
Anwar Nasution, former deputy governor of the Bank of Indonesia, said that the US had the deepest and most open market. 'We have a strong interest in the stability of the US dollar and the US economy. After 1997, everyone in Asia built up reserves to beat speculators.'
Masahiro Fukuhara, principal global active strategist at Barclays Global Investors, said that 90 per cent of the reserves of the Bank of Japan were in US dollars: 'We should look to diversify into the euro and other currencies. But if we did, the US dollar would be affected. The Asian economies do not want to upset the US dollar.'
Like its neighbours, China is locked into this devil's bargain, with most of its US$711 billion in foreign exchange reserves as at the end of June held in US dollar instruments.
At current growth rates, they are likely to exceed one trillion dollars by end of next June.
This year as its trade surplus rises and with a Congress angry at the level of the yuan, so the People's Bank is increasingly unable to diversify out of the dollar.
Qu Hongbin, senior China economist of HSBC, forecast that the yuan would reach 7.85 yuan to the dollar by June of next year, against its current level of 8.1 yuan.
'International pressure for revaluation is one element but this does not mean that China will do it to keep US politicians happy. They think the yuan is undervalued by 30 to 40 per cent. Chinese banks and companies need more time to prepare for the change,' he said.
