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Asian finance ministers agree to pool FX reserves

KYOTO, Japan - Asian finance ministers agreed on Saturday to pool their foreign reserves to help avoid a repeat of the financial crisis that devastated the region a decade ago.

The idea of pooling reserves comes as Asian countries such as China are looking for ways to more effectively manage their holdings of foreign currencies.

Ministers from ASEAN member nations along with China, Japan and South Korea (ASEAN+3) have been seeking ways to strengthen the region’s seven-year-old web of bilateral currency swaps, called the Chiang Mai Initiative (CMI), and transform them into a more powerful multilateral scheme.

“Risks factors we face today are not any less than 10 years ago,” said Thai Finance Minister Chalongphob Sussangkarn, who chaired the ASEAN+3 talks held in Kyoto, western Japan, on the sidelines of the Asian Development Bank’s annual meeting.

”The volatility of capital flows and the size of capital flows are even bigger than 10 years ago. That is why we feel that we need a regional project to deal with the problem,” he told a news conference after the meeting.

The ministers said the growth outlook for 2007 remained favourable but there could be challenges from a possible global economic slowdown, large global imbalances and greater market volatility.

“Proceeding with a step-by-step approach, we unanimously agreed in principle that a self-managed reserve pooling arrangement governed by a single contractual agreement is an appropriate form of multilateralisation,” they said in a statement.

The ministers said the group would carry out further studies on how much foreign reserves would be pooled, who would manage them, and how funds would be provided from the reserves if a country faced a liquidity shortfall.

But having a “self-managed” reserve pooling arrangement would mean any existing international bodies such as the Asian Development Bank would not manage their reserves, officials said.

South Korean Finance Minister Kwon O-kyu told Reuters earlier on Saturday that member countries would still manage their funds at their central banks.

FASTER AND EASIER With its foreign exchange reserves surging to $1.2 trillion, China has said is setting up a new state-run agency to help manage part of its foreign reserves.

“Setting up such a company could not be successfully finished within one or two days,” Chinese Finance Minister Jin Renqing ·aid, adding that it has not yet made any investments.

Foreign reserves have more than doubled in many Asian countries since the financial turmoil that hit the region a decade ago.

Now, Asian countries including China and Japan have foreign reserves totalling around $3.1 trillion, accounting for about two-thirds of the world’s total.

Currently the CMI is a network of 16 bilateral currency swap agreements that total $80 billion.

The idea of the CMI is that a country with a short-term liquidity shortfall can borrow reserves from partners in the network to absorb any heavy selling pressure on its currency without having to resort, as in 1997, to a damaging devaluation.

None of the CMI credit lines has yet been tapped.

Placing reserves in a common pool would make the process even faster and easier for potential borrowers to obtain funds once they meet pre-agreed conditions.

Pooling foreign exchange reserves under the CMI would also reduce the level of reserves each country needs to maintain to ward off any future crisis, and developing countries within ASEAN could use those funds to help develop their economies.

Ministers also agreed to widen studies to develop local bond markets, including exploring new debt instruments for infrastructure financing and steamlining procedures so bonds can be issued in several countries with common documents and licences.

Illiquid bond markets and heavy reliance on short-term bank loans were held partly to blame for escalating the Asian crisis. Stronger local bond markets can raise more funds in their own currencies and keep Asia’s savings within the region.

The Association of Southeast Asian Nations (ASEAN) groups Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.