China Emerges As Asia's Bastion of Financial Stability

China, with a vast reservoir of currency reserves, has emerged as a bastion of financial stability in a bruised and battered region, according to a report released by Morgan Stanley on Monday.

Analysts from Morgan Stanley believed that if China garners the long sought prize of WTO accession, it will have come a long way in its ascendancy as a pan-Asian leader.

Commenting on the recent Asian Regional Financial Agreement several leading Asian nations reached on the past weekend in Thailand, Stephen S. Roach, chief economist with Morgan Stanley Dean Witter, predicted that China's willingness to join with Japan will forge a new direction for pan-regional leadership.

The agreement was a Japanese-sponsored plan to establish a pan- Asian liquidity backstop that could be used to help prevent future speculative attacks on the region's currencies.

With the courtesy of a closed capital account, a vast reservoir of currency reserves and limited exposure to external debt, China was able to hold the line far better than others in the region, the latest research report said.

As Asia shares about half the world's total reserves, the region is now taking matters into its own hands, moving outside the Washington-IMF sphere of control, the report said.

"The next financial crisis will not come in Asia," Roach said, adding that he continued to be impressed with the region's powerful cyclical recovery.

"There is nothing but upside to our own forecast of pan- regional GDP growth of 6.7 percent for non-Japan Asia over the 2000-2001 interval," Roach said.

There are now increasingly optimistic signs on structural reform that holds the key to crisis prevention and pan-regional economic stability, he said.

Statistics showed that countries which involved in the newly created network of currency swaps, including China, Japan, South Korea and members of the Association of South East Asian Nations, have collectively more than US$700 billion in foreign exchange reserves at their disposal, and the size of this pool excludes the roughly US$200 billion of additional reserves currently held by Hong Kong and Taiwan.

"Such a large pool of pan-Asian assets could make a real difference at times of crisis," Roach said.

But all this is not to say that Asia has, by any means, completed the onerous task of post-crisis repair, the economist said. "The speed of corporate restructuring could certainly be faster, especially with respect to Japanese corporates, South Korean chaebols and China's state-owned enterprises," Roach noted.

Roach cautioned that banking reforms continue to lag in most of the region and an increasingly powerful cyclical recovery has the potential to lessen the urgency for structural reform. "Asia must be mindful of the risk of complacency in this regard," he warned. Roach concluded that with the forging of a new axis of leadership between Japan and China that could have much to say about the region's economic and political prowess in the 21st century, Asia is now taking matters into its own hands in shaping a new financial architecture.

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