You want to set up an Asian financial institute. What would it do and why is it necessary?
Look at the domestic markets, at different levels of development – we need to find concrete ways to help all countries at the lower level to move forward. We can if first we know what the impediments are and second someone tells them what needs to be done to clear up the impediments. Of course, it has to be done gradually and with national agendas in mind. Unless we have a channel where we can involve the political process the effort may be futile.
At the moment there are a lot of overlaps. The subject has been talked about quite widely now and a lot of people have wanted to help. We could end up with duplicates or worse – reports sitting on the shelf. That’s why we are looking at a process that has to survive five to seven years – that’s how long it will take. Take our case. We had a problem with the tax regime that prevented the private retail market in Thailand taking off and also hampered the development of interest rate hedging. We had been in discussions with the revenue department for about two years; finally we asked a group of experts from the IMF to find out which portion of which law was the problem. If you just lift one thing, you can end up with an imbalance elsewhere.
After we have identified the impediments, we need another two years to find out which bit to concentrate on, then go to parliament. If we just rely on our present framework – ASEAN +3, which has set up six working groups, each meeting every three months or so – we need someone to act as secretariat and someone needs to report to the ministry of finance regularly, to see if reports have been acted upon.
What are the ideas being aired for the second Asian Bond Fund?
I cannot say when it will be launched, how much it will be, which countries will join, and which countries it will be invested in.
I can say that we are currently considering two alternatives – a two-tier fund and a pan-Asian fund. The second fund would be open to private-sector investors. But should it involve international investors or should it involve only Asian investors? And if it involves Asian investors, how do you deal with the question of expectations – sometimes they might think the principal is protected.
Then there is the question of the manager. Should one try to encourage the growth of local fund managers?
A third issue is how should the manager manage the fund? Should he manage it actively or simply track the market? If the latter, you have to establish a benchmark in each market and if it is not liquid enough, you have to construct one. Then there are other questions: should you hedge your currency exposure? And finally do you go into all countries at the one time or only when they are ready?
The political agenda behind the fund, especially in Thailand, has an element of anti-globalization about it. How does the regionalist rhetoric square with the central bank development process?
Frankly, it is significant at both levels. At the grassroots, non-sexy level, the fund strengthens the financial system, providing a better channel to evaluate credit risk. At the political level, we are seeing something of great significance here. Up to now all reserves are going to G3; it’s about time we started looking at fellow Asian countries as an asset class. You can see, some time from now, with more active trade between countries, especially when one country exports a single product – the so-called vertical specialization – currencies will increasingly be aligned as countries get more comfortable with each other and hold each other’s reserves. Asian countries want Asian risk. Look at the region’s trade with China, which is happening more and more.
How can you combine continued exchange controls with the development of long-term bond markets?
You can’t. The more developed you are, the less control you have. Controls will have to be lifted in a manner that will not create problems for the country. A bond market is long term; controls are short term.
