A plan for the ADB to manage some of Asias $3 trillion of foreign exchange reserves was unveiled yesterday and sparked claims that it would put the ADB in competition with state reserve-management agencies and private sector fund managers.
The proposal was announced in Kyoto yesterday, as one of a series of recommendations from the Eminent Persons Group (EPG) retained by the ADB to review its future role.
It comes at a time when Japan is considering following the example of China and South Korea in setting up Singapore-style agencies to manage part of their reserves.
The plan is unlikely to be welcomed by private fund managers in Japan. They are very interested in getting slice of Japans $1 trillion reserves to manage, Goldman Sachs Japan vice chairman Shigemitsu Sugisaki told Emerging Markets.
The proposal for the ADB to play a role was revealed during an ADB governors seminar by EPG chairman Supachai Panitchpakdi, who suggested that it could lead to better management of reserves. But Hong Kong Monetary Authority chief executive Joseph Yam demanded to know what can the ADB do that central banks cannot, and whether the ADB was going into competition with financial markets.
Deutsche Bank Group vice chairman Caio Koch-Weser, a member of the EPG, insisted during the seminar that the group suggests a catalytic rather than competitive role for the ADB in the reserves management arena. This would dovetail with the ADBs existing role in assisting the development of Asian financial markets, he said.
Koch-Weser, a former senior World Bank official and one-time deputy finance minister of Germany, said later, however, that the ADBs role has yet to be clarified. There was a lively debate on this, he told Emerging Markets. There are issues that will have to be overcome. I would say that it is a catalytic role, and not a management role, but there are different views on that.
The ADB does not have the skills to manage reserves, Koch-Weser acknowledged, although the EPG has suggested that the bank should recruit new types of expertise in future.
The proposal for the ADB to enter reserves management has provoked confusion among market practitioners over just what its purpose is, David Hale, chairman of Chicago-based Hale Advisers said.
Hale, a former US presidential economic adviser, told Emerging Markets that if the fund was used to promote the development of Asian bond markets, that would be a major positive in a region where the dollar and the euro probably account for 90-95% of reserves. But the proposal is not yet clear, Hale cautioned.
Koch-Weser meanwhile praised the discussions on establishing specialised reserve management agencies, based on Singapores Tamasek, in China and Korea. Its the right direction to go, he said. There is a view in the investment banking community that this should rely to the maximum extent possible on the private sector, he said.
The issue is very topical in Japan, said Sugisaki, a former deputy managing director at the IMF. Asset managers in Japan are encouraging the Japanese government to consider different ways to manage foreign reserves, he said. Detailed discussion will take us into the issue of how much of our assets we should have in foreign currency and whether we should continue to accumulate foreign assets or not.
Japan still has to reach a consensus on whether part of its reserves should be separated from the main body of the funds and then managed separately, Sugisaki added.
Once that decision is taken, private fund managers could take over management of part of the funds, which are is currently managed very cautiously by finance ministry officials, he added.