When the ADB began talking about plans to create an Asian Currency Unit, or ACU, late last year, the rest of the world wondered whether Asia was about to embrace regional monetary union in one big leap. Some were alarmed. “From the Americans, there was an outcry, seeing it as a danger to the dollar,” ADB executive director for Germany and the UK, Volker Ducklau told Emerging Markets. Europeans were agog too.
Europe established the European Currency Unit, or ECU, as a unit of account around the same time that it set up an exchange rate mechanism (ERM) to align continental exchange rates with one another, and also established a European monetary fund (ERM) to finance foreign exchange market interventions for keeping exchange rates in line. Was Asia about to follow suit, many wondered?
Masahiro Kawai, a Japanese former senior financial bureaucrat who heads the ADB’s Office of Regional Economic Integration, rushed to assuage such expectations (or fears) by pointing out that the proposed ACU was merely an “index” of how Asian exchange rates move relative to each other, and was not part of any secret design to achieve what ADB president Haruhiko Kuroda has said should be Asia’s ultimate aim of a common currency.
“My view is that, although it is quite unrealistic to talk about a single currency at this stage, it will guide us on certain strategies,” Kawai told Emerging Markets.
But what has since sent the ADB back to the drawing board on the ACU idea is not any intervention by the US treasury and others, as happened during the abortive attempt to introduce
an Asian Monetary Fund at the time of the Asian currency crisis in 1997. This time it has been a market intervention by bankers and others whom the ADB has since consulted on the ACU scheme.
Friendly
The elegant bureaucratic design drawn up by Kawai, with Kuroda’s backing, envisaged the ACU index being based on the currencies of the ten Asean states plus those of Japan, China and South Korea. It would be a “market friendly” device, designed to facilitate the issue of multi-currency Asian bonds and to assist hedge funds and other financial institutions interested in Asian currency investments, the ADB insisted.
But market practitioners politely pointed out that there was little use in a regional currency index that did not include currencies such as the Hong Kong dollar or the New Taiwan dollar, which are heavily dealt in by markets, while including more exotic South-east Asian currencies that are not. The ADB promised to take this on board, but China was not happy about inclusion of the Taiwanese currency, and other Asian countries also wanted a look in.
“Now we see the idea has been scaled down because of the quarrels in the background,” says Ducklau. Kuroda too acknowledged in an interview with Emerging Markets that the ACU is on the back burner for the time being. “If a possible currency market indicator or index is to be introduced, it doesn’t make sense unless it is useful for the market,” he says. “At this stage we are still studying and consulting with market participants and related countries. We have no intention to approach this issue in Hyderabad.”
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