ADB meeting a platform for ‘orderly investment’

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ADB meeting a platform for ‘orderly investment’

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Will Japan add to its growing pool of foreign reserves by investing in Korean government bonds for the first time ever?

This question will be answered - and details determined - in the coming days as the two governments are due to meet during the annual Asia Development Bank (ADB) meeting that kicks off later today in the Philippine capital of Manila.

Economic policy makers from 30 countries are gathering to attend the 45th ADB meeting, a platform for Korea, Japan and China to discuss ways of strengthening their economic ties in the post-financial-crisis era.

“We are in the process of creating an information-sharing framework for orderly investment,” Finance Minister Bahk Jae-wan told reporters last week. “Basically, investments in Korean treasuries are a positive sign. But just as light creates shadows, we have to prepare for any possible negative outcome.”

Japan bought 65 billion yuan ($815 million) of Chinese debt in March, but this would mark the first time it has ever invested in Korean government bonds.

Korea has also paved the way for the unprecedented move of buying Chinese treasuries after the People’s Bank of China last week authorized the Bank of Korea to buy yuan-denominated bonds on the interbank market in January.

The BOK said Korea’s quota on Chinese treasuries is 20 billion yuan, adding that it will begin with a small initial investment and then build gradually upon it.

“The bond yield on 10-year Chinese treasury bonds is 3.5 percent, which is a higher return than similar financial products from other countries,” said Jun Kwi-kwan, head of the BOK’s foreign reserve management department.

Financial cooperation among the three Asian economies has been building up in recent years. Last October, Seoul and Tokyo expanded their bilateral currency swaps to $70 billion, while those between Korea and China doubled to 360 billion yuan.

The three countries are now talking with the Association of Southeast Asian Nations about doubling their multilateral currency swaps.

The greenback accounts for over 60 percent of Korea’s foreign reserve, but the global credit crunch gave rise to strong criticism of this overdependence on the dollar and fueled belief that the country needs to diversify to protect itself from future shocks.

This is supported by the fact that the yield on most treasuries from developed countries, including the U.S., is close to zero as they generally adopt loose monetary policies. In contrast, snapping up Chinese debt can be much more lucrative.

Moreover, the long term value of U.S. bonds are expected to drop after the country’s credit rating was lowered last year for the first time in its history.

Japan is also getting jittery as dollars make up 70 percent of its foreign reserve.

Meanwhile, the Organization for Economic Cooperation and Development (OECD) cautioned Korea just last week about its ever-growing foreign reserve. The OECD advised utilizing currency swaps instead of holding excessive amounts of foreign currency.

Korea is the world’s seventh largest economy in terms of its foreign currency holdings.

“The international community says our foreign reserve is too large considering the size of our economy,” Bahk said. “However, in dealing with two crises in 1997 and 2008, we had a nightmarish time dealing with our foreign reserves so it is inevitable that we would move to shore these up above the [OECD] average in light of our open market’s economic reality.”

He said the size of the holdings had not been artificially swollen by the government but sprang due to growing confidence in the domestic economy.

“We didn’t force the accumulation of foreign reserves to this level,” Bahk said. “Instead, we maintained a surplus in our current account and, thanks to our improved external credibility, we were able to consistently increase the inflow of overseas capital.”

Another issue likely to be addressed at the ADB meeting is the implementation of bank levies. Since the financial crisis four years ago, European leaders have been trying to narrow their differences in terms of the requirements they impose on banks in order to stave off another collapse.

At this week’s meeting, economic leaders will discuss the merits of expanding the Asia development fund (ADF) to a record $12.5 billion for the period 2013-2016. The fund will be used for various infrastructure projects including roads and schools in underdeveloped countries.

In 2010, the ADB spent $100 million on setting up an electricity network between Bangladesh and India, and another $35 million on reconstructing roads in Cambodia.

Apart from Bahk, other leading bankers and policy makers from Korea attending the meeting include Bank of Korea Governor Kim Choong-soo, Hana Financial Group Chairman Kim Jung-tai, KB Financial Group President Yim Yong-rok, and Korea Exchange Bank President Yun Jong-ro.

By Lee Ho-jeong [ojlee82@joongang.co.kr]

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