February 1, 2002｜China
Researcher, The Tokyo Foundation
The foreign exchange reserves of the countries of Northeast Asia amount to $980 billion, accounting for half of total worldwide foreign exchange reserves. According to my own estimates, by November 2001, total worldwide foreign exchange reserves totaled $1.95 trillion, with 50.26% of this being accounted for by Northeast Asian countries. Of this, Japan holds more than any other country across the globe, having $403.8 billion; mainland China is in second place with $212.2 billion (as of the end of December), but if Hong Kong ($112.2 billion) and Taiwan (about $115 billion) are included, the three Chinas together usurp Japan’s position as the world number one, exceeding the Japanese total by $140 billion. Moreover, if we add the approximately $100 billion held by the ROK and the $36.6 billion held by Russia, this accounts for half of the world’s foreign exchange reserves. (Furthermore, if we include ASEAN foreign exchange reserves, the proportion exceeds 60% of the world total.)
Even if we exclude the whole of Russia on the grounds that it is a little problematic to include it in the Northeast Asian region, if we classify by economic bloc, there should be no major problems in considering Hong Kong and Taiwan to be part of Northeast Asia. There is no doubt that the leverage of the countries of this region as players in international financial markets will increase due to their abundant foreign exchange resources, and such developments are actually already emerging. For example, China’s currency authorities set the rate for foreign currency deposits in euros and yen at 15%, but since the euro has come into circulation this year, the authorities made a commitment to raise the euro rate to 20%. This may well have a direct effect on the international standing of the yen and the dollar.
The abovementioned figures are taken from the official statistics of each country, but financial and foreign exchange resources that are not reflected in the statistics also exist on a vast scale. It is estimated that mainland China has more than $1 trillion of foreign exchange resources. As China lacks a healthy domestic financial system, some foreign exchange retreats to international currency markets in such places as Hong Kong and the U.S., and there are a not inconsiderable number of cases in which this returns to the Chinese market as “foreign capital”. Although Northeast Asia has abundant funds due to its high level of foreign exchange reserves and high savings rates, as it does not have a common currency zone and its financial markets are undeveloped, foreign exchange resources within the region flow out to U.S. markets, where they are used to buy U.S. government bonds, thereby supporting the U.S. economy. At the same time, there is a vicious circle in which some of these funds are invested in East Asia by multinational companies and garner high returns; once there is financial instability, these funds flow overseas again.
Northeast Asia’s standing in the global economy is improving as a result of the emergence of China, but at the same time, there are large differences between states and a balance has yet to be achieved. There are substantial development needs and a high demand for funds in this region; with two-thirds of the region’s population of 1.5 billion living in developing countries, there is great potential for development. Serious development will take place from now on. However, the current situation is that money does not reach those places that need funds; in order to break through this problem, thought must be given to an intra-regional money flow system that uses the region’s abundant funds to advance regional development. The idea of constructing a common currency zone should be considered to be a dream for the future; in fact, the most pressing issue at present could well be the construction of a mechanism for financial stability. First of all, currency and foreign exchange stabilization measures are indispensable. The “AMF Concept” propounded by Japan reached an impasse due to the objections of the U.S. and the IMF, but it should not be written off just because of this. The devising of the New Miyazawa Initiative and the agreement of the Chiang Mai Initiative based on a currency-swap arrangement were a significant step forward in terms of efforts aimed at cooperation in East Asia. In the future, inter-governmental policy dialogue between the countries of the region should be strengthened, while the establishment of a new “Asian Monetary Fund” should be promoted, based on the ASEAN + Japan, China and the ROK multilateral cooperative framework.
Next, it is necessary to establish a multilateral development finance institution to further regional development. The Northeast Asian Development Bank (NEADB) concept has been proposed numerous times over the last ten years, but a considerable amount of time is still needed before it can be realized. However, this concept is beginning to be discussed as a policy issue in such countries as the ROK, China and Japan. All of a sudden, activity by central and regional governments and the private sector in related countries, aimed at its realization, is intensifying.
I would like to propose that discussions begin with regard to the establishment of the “Northeast Asian Trade and Investment Bank”. As part of the intra-regional money flow system, this would be able to utilize the region’s abundant funds, and could be used to promote trade and investment and support joint development projects, not only in developing countries, but also those that straddle national borders within the region, as well as providing assistance to developing countries in their transition to a market economy. Although it is certainly the case that the ADB (Asian Development Bank) has played an important role in regional development, there are limits to the development that it can achieve in Asia, which encompasses 60% of the world’s population. In Latin America, there are five multilateral regional development finance institutions, while there are twelve such institutions in Africa and the Middle East. In addition to these, the AMF (Arab Monetary Fund) was established in 1976 by 22 Arab League states (Japan’s AMF concept is an infringement of copyright, so the name should be changed). The degree to which East Asia’s financial infrastructure is lagging behind in comparison with this is obvious. The assertion that development in Asia can be achieved by means of the ADB alone does not hold up to scrutiny.
As one element of cooperation in Northeast Asia, the establishment of the abovementioned multilateral financial institutions is essential to developing and strengthening the region’s financial infrastructure. Were this financial infrastructure to be developed, an intra-regional money flow mechanism would be formed and greater economic dynamism would doubtless be the result.
[Translated by ERINA]