Asian FX reserves no shield against crisis, says ADB chief

Asian Development Bank President Haruhiko Kuroda

ISTANBUL - Asia's vast foreign exchange reserves are no guarantee against storms like the 1997 financial crisis and the region needs to strengthen its financial safety net, ADB President Haruhiko Kuroda said on Monday.

Kuroda, speaking ahead of the annual meeting of the Asian Development Bank in Istanbul, renewed his call for China to adopt a flexible currency sooner rather than later, but said it was up to Beijing to decide the timing of the move.

Regional currencies are expected to be high on the agenda when Asian finance ministers and central bank chiefs kick-off a three-day meeting from Wednesday.

"Now, no currency, (or) financial crisis is likely in East Asia... but in 5, 10, 15 years the situation might change, " Kuroda said.

"In order to avoid any currency crisis in the future it is better for Asean+3 countries to have a significant, sufficiently-large and well-functioning kind of a safety net. "

Asia has around US$2.5 trillion ($3.45 trillion) in foreign exchange reserves or about two-thirds of the world's total.

Japan, China and South Korea, the world's top foreign exchange reserve holders, are meeting in Istanbul on Tuesday. The three Asian powerhouses together with the Association of South East Asian Nations are known as the Asean+3.

Although he said the prospect of a currency crisis looked distant, Kuroda, a former top financial diplomat in Japan, said high oil prices were the major near-term downside risk to mostly oil-dependent Asia.

"We still think and hope oil prices will gradually come down to US$40 per barrel before the end of the year," he said.

Another source of uncertainty is the timing of China's yuan revaluation, a move that has that potential to rock global financial markets.

Speculation has been mounting that China would soon revalue the yuan, pegged at 8.28 to the dollar, after the Chinese central bank chief said last month that everything was in place for currency reform.

"When and how that should be done has to be decided by the Chinese authorities," Kuroda said.

He said Asian countries should boost efforts to promote a financial safety net, called the Chiang Mai Initiative (CMI), by expanding it and making it more co-ordinated.

The CMI currently has 15 swap lines totalling US$37.5 billion.

The 1990s financial crisis taught Asia the danger of throwing open its doors to foreign capital when financial markets are underdeveloped and banking systems are weak. When the money abruptly flowed out, devaluation and recession ensued.

To reduce its vulnerability to fickle foreign capital flows, Asia is striving to build up local-currency bond markets and to reduce obstacles to cross-border portfolio investment.

Kuroda said the region should forge closer ties by promoting infrastructure investment, financial cooperation and free trade in smaller groupings because the diversity of the region made faster integration difficult.

Asean groups Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

- REUTERS