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Message from ADB's President Contributors Acknowledgements Executive Summary and Recommendations Jeffrey D. Sachs, Masahiro Kawai, Jong-Wha Lee, and Wing Thye Woo Paper Summaries (full papers downloadable) International Monetary Advisory Group Global Financial Crisis, its Impact on India and the Policy Response Nirupam Bajpai To What Extent Should Capital Flows be Regulated? Maria Socorro Gochoco-Bautista The Case for a Further Global Coordinated Fiscal Stimulus Willem Buiter Managing a Multiple Reserve Currency World Barry Eichengreen From the Chiang Mai Initiative to an Asian Monetary Fund Masahiro Kawai An Asian Currency Unit for Asian Monetary Integration Masahiro Kawai The International Monetary System at a Crossroad Felipe Larrain B. Towards a New Global Reserve System Joseph Stiglitz A Realistic Vision of Asian Economic Integration Wing Thye Woo An Asian Monetary Unit? Charles Wyplosz Will US fiscal Deficits Undermine the Role of the Dollar as Global Reserve Currency? If So, Should US Fiscal Policy be geared to Preserving the International Role of the Dollar? Yongding Yu International Monetary Working Group International Reserves and Swap Lines: the Recent Experience Joshua Aizenman, Donghyun Park and Yothin Jinjarak The Future of the Global Reserve System Daniel Gros, Cinzia Alcidi, Anton Brender, and Florence Pisani Renminbi Policy and the Global Currency System Yiping Huang Will the Renminbi Emerge as an International Reserve Currency? Jong-Wha Lee Asia's Sovereign Wealth Funds and Reform of the Global Reserve System Donghyun Park and Andrew Rozanov Reforming International Monetary System Kanhaiya Singh Designing a Regional Surveillance Mechanism for East Asia: Lessons from IMF Surveillance Shinji Takagi

16. Asia's Sovereign Wealth Funds and Reform of the Global Reserve System

Donghyun Park and Andrew Rozanov

Developing Asia's foreign exchange reserves have grown explosively since 1990. The reserve growth mirrors the transformation of the region from a current account deficit region to a surplus region since the Asian financial crisis. The region's reserves now comfortably exceed all plausible estimates of what the region needs for traditional liquidity purposes. The emergence of excess reserves has led to widespread calls for more active reserve management. This, in turn, has resulted in the creation of new sovereign wealth funds (SWFs) such as China Investment Corporation (CIC) and Korea Investment Corporation (KIC) in the region. The establishment of SWFs and, more generally, reorientation of excess reserve management from passive liquidity management to active profit-seeking investment will dilute the dominant role of the US as a global reserve currency and thus speed up the reform of the global reserve system. This is because dollar-denominated assets enjoy a much more dominant position in the global market for reserve assets – i.e. US government bonds – than they do in the global market for riskier assets – i.e. equities and corporate bonds.

At the same time, SWFs can help redesign and restructure reserve portfolios to make them more robust and resilient to the reform of the global reserve system. That is, by exposing reserve managers to a more diverse mix of currencies and asset classes, SWFs and more active reserve management will better prepare them for the less dollar-centric global reserve system of the future. In addition to SWFs, other policy options for more active reserve management include transferring some excess reserves into national pension funds or into exchange traded funds which are distributed among local investors. Regardless of the exact form of returns-oriented reserve management, it will require that countries build up a critical mass of skills and expertise in wealth preservation and managements.