ASEAN and Looming Currency Wars
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Among the many things that were on the table at the recently finished ASEAN Summit in Phnom Penh was an expansion of the Chiang Mai Initiative fund of foreign exchange reserves to defend against currency speculation of any one member. China, Japan and Korea are also contributors to this fund. Together they make up the ASEAN+3 bloc. The thirteen member group has proposed expanding the size of the fund to $240 billion, double its current size.
Many of these countries remember the attacks on their currencies that took place at the end of the last century as well as recently during the global recession of 2009 and do not want to go through it again. They, rightly, believe that they have to pool resources to protect themselves in the event of a run on any one of them which could have serious spillover across borders.
A number of moves by members have occurred in the past few months. China has moved slowly but steadily towards convertibility of the Yuan, recently widening the daily trading range from 0.5% to 1% as well as opening up the quotas for foreign investment vehicles to hold Yuan as an investment. The Dim Sum Bond market has grown nearly twenty-fold since China de-regulated it in July 2010 allowing foreign corporations the ability to raise capital denominated in Yuan at far more favorable rates than they can get from U.S. banks. The Guggenheim Yuan Bond ETF (NYSEMKT: RMB) is one of three such funds that started up in 2011.
Vietnam’s foreign reserves have expanded by at least 50% in the past nine months as the State Bank (SBV) has moved aggressively to curb the domestic use of both the U.S. Dollar and gold in the day-to-day economy. The SBV removed more than $6.3 billion from the Vietnamese economy in the first quarter of 2012 while the country posted its first trade surplus in three years.
Even so, the worry, and with good reason, is that even the $240 billion sum may not be enough in light of the fragility of the situation over in the European Union and the 800 lb gorilla in the room, the profligacy of the United States. Japan (Powershares DB Inverse Gov Bond ETN (NYSEMKT: JGBS) ) has gone on their own form of quantitative easing, openly monetizing JGBs granted to them by the strong appreciation of the Yen since Fukishima and the demise of the Yen/Dollar carry trade in the past few years. This gives Japan and her corporations a window of opportunity to invest all over Southeast Asia, pouring billions into their geographic neighbors in the hope of avoiding their twin time bombs of both crushing Debt to GDP levels and a rapidly aging population.
The Dollar has become the carry currency of choice after two decades of the Yen occupying that dubious status.
The signs are everywhere that the ASEAN+3 nations are tired of the U.S. Dollar trade forcing them to eat the inflation that is being exported to their shores by Ben Bernanke and the Federal Reserve. We are seeing very rapid move by these nations to hitch their collective fates to each other, banding together to create for themselves a currency and equity bloc to rival the West. A cross-border equity exchange that will link the exchanges of all members, with Singapore’s (iShares MSCI Singapore Index (NYSEMKT: EWS) ) and Malaysia’s (iShares MSCI Malaysia Index (NYSEMKT: EWM) connecting first, will open in June. Thailand will be added later in the year.
One of Vietnam’s biggest companies Hoang Anh Gia Lai just split off its rubber division listing it on the Singapore exchange with a 20% stake being taken by Temasek who, in turn, just bought $2.3 billion in shares of in the International and Commercial Bank of China from Goldman Sachs. The Korea Exchange has been instrumental in building and investing in the stock exchanges in Laos and Cambodia and has been working closely with the other ASEAN nations to build more robust cross-listing of foreign equities on the Korean exchange.
It is important to factor in all of these little moves into your investment plans as capital continues to flow from the West to the East. Add to these moves to the nearly insatiable Chinese demand for gold and you get a clearer picture of what is really happening behind the headlines in the financial press.
Peter Pham has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.