INTELLIGENCE MEMORANDUM THE ASIA-DOLLAR MARKET

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600030074-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 9
• Document Creation Date: December 22, 2016
• Document Release Date: October 25, 2011
• Sequence Number: 74
• Publication Date: June 1, 1970
• Content Type: IM

Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: C IA-RDP85T00875R001600030074-7
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Secret
INTELLIGENCE
Intelligence Memorandum
~__Declassified in Part - Sanitized Copy Approved for Release 2011/10/31: CIA-RDP85T00875R001600030074-7
DIRECTORATE OF
 In=
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
Cecluded Irom automatic
downgrading and
dedan{Rcotion
WAIM
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
June 1970
INTELLIGENCE MEMORANDUM
The Asia-Dollar Market
Introduction
In January 1969 an organized legal market in US dollars-known as the
Asia-dollar market-opened in Singapore. This new overseas market in US
dollars, while similar in concept, differs significantly from the Eurodollar
market in origin, scope, and outlook.* This memorandum reviews the brief
history of the Asia-dollar market and examines the unique characteristics
that are likely to influence its future development. Black markets in US
dollars operating in Southeast Asia are not discussed.
Background
I. In mid-1968, US bankers, with the cooperation of the Singapore
government, quietly began drawing up blueprints for a miniature Asian
version of the large and well-known Eurodollar market.** The bankers'
principal objective is to mobilize large quantities of Asian-owned dollars for
investment in Asia. The market's prime benefit to branch banks in Asia is
that they would be less dependent on their head offices for loanable dollar
?? Like Eurodollars, Asia-dollars basically are demand or time deposits denominated in
US dollars that range in maturity from two-day call to one year. Only persons or
institutions from outside of Singapore are authorized to make deposits in the Asia-dollar
market, although residents of Singapore are permitted to borrow from it. New markets
have also been created in Singapore for a few other hard currencies, including pounds
sterling, deutschemarks, and Swiss francs. US dollars, however, account for about 95% of
the total "Asia-currency " market.
Note: This memorandum was produced solely by CIA. It was prepared by the Office of
Economic Research and was coordinated with the Office of Current intelligence.
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funds. Bank of America inaugurated the Singapore-based "Asia-dollar"
market at the beginning of 1969. Since that time, eleven additional banks
have obtained licenses from the Singapore government to deal in Asia-
dollars. Most of these dollar funds, which total only about $150 million,
have been deposited with the three participating US banks: Bank of
America, First National City Bank of New York, and Chase Manhattan Bank.
2. Eager to develop the Republic into Southeast Asia's leading
financial center, the Singapore government became a willing partner in the
Asia-dollar scheme. Its most important contribution to this goal was made
on 20 August 1968, when it abolished the tax payable on interest on
nonresidents' deposits to attract short-term foreign capital. Other countries
in the area normally impose a tax of 10% to 40% on interest paid on
deposits. Further in keeping with its ambitions, the Singapore government
established a gold trading market in May 1969.
3. Several other considerations contribute to the suitability of
Singapore as a home for the Asia-dollar market. This city has been the center
of commercial activity in Southeast Asia since the middle of the 19th
century, and its banking and insurance heritage is unrivaled in the area.
Furthermore, Singapore is tied into a worldwide telex network, an advantage
that has proved to be of great value for negotiating large volume and rapid
international financial transactions. Banks in Singapore also have a decided
advantage over banks elsewhere in Asia by maintaining the same hours of
operation as those in London, thus strengthening the Asia-dollar fink with
the hub of Eurodollar market activity. The two most logical alternative
locations for the Asia-dollar market-Hong Kong and Tokyo-are unsatisfac-
tory because the former is unwilling to eliminate its taxes on interest and the
latter is handicapped by burdensome exchange controls on capital transac-
tions.
4. Asia-dollar deposits and loans are characteristically much smaller
than those in the Eurodollar market and, therefore, are more closely tailored
to the local needs of Asian depositors and borrowers. Asia does not have the
huge institutional investors or financiers that are commonly found in
Europe. Consequently, Asia-dollar transactions will rarely be in the
multimillion dollar range as is common in Europe. The $25,000 minimum
deposit in the Asia-dollar market, for example, appears quite small in
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contrast to what is normally a'$250,000 minimum for deposits in the
Eurodollar market.
5. Official banking institutions represent the largest potential source
of deposits in the Asia-dollar market. The Singapore government probably
has supplied roughly one-half of the total funds presently in the market, but
other governments in Asia have not contributed much to the market yet. As
confidence in the Asia-dollar market grows, Asian governments are expected
to switch some of the foreign exchange reserves they now have invested in
the Eurodollar market to the closer Asia-dollar market 25X1
approximately $3 billion of Asian official foreign 25X1
exchange reserves is now being held in the Eurodollar market. Some old
animosities will probably prevent the potential for official sources being
fully realized. For example, Malaysia has reserves of $600 million to $700
million invested in Europe which it flatly refuses to deposit in Singapore.
6. Commercial banks and international companies operating in Asia
are also likely to be important suppliers of Asia-dollar deposits. The banks of
Indonesia, which are now permitted by the government of Indonesia to place
foreign currency deposits overseas, represent an important potential supply
of funds for the market. Another major prospective source consists of the
overseas Japanese companies which are increasingly being allowed by the
Japanese government to invest their surplus dollars and other convertible
currencies abroad. From time to time, non-Asian investors may be attracted
to the Asia-dollar market because of the small minimum deposits required
and the pledge by participating banks not to reveal the identities of deposits
to anyone. Partly for this reason, the Commercial Bank of Czechoslovakia
committed itself in 1969 to transfer up to $2 million to the Asia-dollar
market.
7. One of the principal targets of the Singapore banks in their effort to
attract more Asian-owned dollars to the Asia-dollar market is the Overseas
Chinese community. Many of the more than 12 million Overseas Chinese
(excluding those in Singapore) in Southeast Asia have amassed substantial
fortunes in dollars through the large economic power they have wielded-
especially in commercial sectors-in such countries as Malaysia, Cambodia,
Indonesia, the Philippines, Thailand, and South Vietnam. Singapore, the
only country in the world to be formed mainly by Overseas Chinese, has
historically maintained a posture of close solidarity with other Chinese
communities in Asia. In past years the largest source of foreign deposits in
Singapore has been the Chinese population of Indonesia. More recently, the
flow of funds into Singapore has come mainly from Hong Kong.
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8. Few Asia-dollars have been loaned out in Asia thus far; rather most
of them have been placed in the Eurodollar market. Others have been
transferred from US bank branches in Singapore to their parent banks in the
United States or other branches in Japan. US banks, however, remain
convinced that a rapidly growing share of these deposits will be invested in
Asia.
9. Prominent among the purported aims of the Asia-dollar market is
the desire to provide a new source for medium-term development loans to
support industrial growth in Asia. The Economic Commission for Asia and
the Far East (ECAFE) discussed in general terms the possible role of the
Asia-dollar market in financing regional development during its 25th plenary
session in the spring of 1969. From the discussions emerged the hope that
Asian-owned dollars can now be channeled to chronically capital-short Asian
countries for development instead of winding up in Europe. Unlike the
Eurodollar market, small firms are able to tap the resources of the
Asia-dollar market. Loans as small as $50,000-often not large enough to
interest European bankers-are not unusual in the Asia-dollar market. Because
of the higher risk factors on loans in the Asian area and the practice of using
short-term deposits to extend medium-term development loans (as well as
the greater costs entailed in the smaller amounts of funds changing hands in
the Asia-dollar market), the spreads between the rates of interest chargeable
on loans and the rates paid on deposits in the Asia-dollar market are
appreciably greater than comparable spreads in the Eurodollar market.
10. It is too early to predict whether Asiadollars will in fact be used for
development purposes to any great extent. There have been few Asia-dollar
loans extended for this purpose yet, with the exceptions of several small
projects in Indonesia and Malaysia. Projects in Singapore, Australia, and New
Zealand are likely to be the most attractive candidates for Asia-dollar loans
in the future because of the relatively stable economic and political
prospects for these countries. Both Japan and South Korea probably will
continue to take all the Asia-dollars they can get. US international
corporations could well become the best customers for Asia-dollars in the
area. They are known for their resourcefulness in raising large sums of capital
overseas for local projects. However, Asia-dollar borrowers, regardless of
nationality, will undoubtedly acquire substantial funds for non-development
purposes, such as working capital.
11. The investment demand for Asia-dollars in Asia has been un-
expectedly weak during the market's first year of operation because of the
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prevailing high interest rates for Asia-dollar loans, which usually have
exceeded 10%. Local currency loans often could be obtained in Asian
countries, mainly through development agencies, at rates of interest well
below this. Although some demand for convertible currencies exists despite
high interest rates, the generally deficient demand for these funds in Asia has
been largely responsible for the exodus of Asian dollars to the Eurodollar
market or to parent banks in the United States.*
Conclusions
12. Based on the favorable reaction of a number of major banks in
Singapore to its creation, the now minuscule Asia-dollar market seems likely
to experience significant expansion in the next few years. Its long-run
potential, however, is not likely even to approach that of the present
Eurodollar market with its mammoth resources, wealth of financial
experience, and vast array of sophisticated banking institutions. Moreover,
the exchange controls that exist in various Asian countries will continue to
inhibit Asia-dollar growth. However, as more potential depositors learn of
the market and gain confidence in it, the Asia-dollar fund, which has grown
only grudgingly over the initial 15 months of the market's lifespan, could
expand within two or three years to $1 billion or $2 billion.
13. Asian governments will probably be the mainstays of the market over
the next few years. US foreign aid receipts and expenditures by US military
forces will continue to boost the official dollar reserves in East and
Southeast Asia. If the market demonstrates an impressive growth per-
formance, Japan is likely to emerge as the major supplier of dollars to the
market.
14. The more immediate problem facing the Asia-dollar market is not so
much one of supply as of demand. Asia-dollar bankers claim that they now
have plenty of money, but they cannot find enough interested borrowers in
the area to utilize it. As credit eventually cases and attendant high interest
rates fall in the Eurodollar and Asia-dollar markets, however, the local
demand for Asia-dollars could well match and perhaps surpass the supply.
* Interest rates on Asia-dollar deposits are usually pegged slight!' below those of the
London-based Eurodollar market. Singapore bankers of course will not pay steep rates for
deposits unless they can lend immediately at a still higher rate. Consequently, with the
soft demand in Asia, most of the Asia-dollars have either been quickly transferred to the
Eurodollar market or to home offices to augment working balances.
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When this happens, the flow of dollar funds from Asia to Europe and the
United States would probably be reversed. The liquidity capabilities of banks
to finance medium-term development loans with short-term deposits are
uncertain at this time. The consensus among bankers in Asia is that the next
year or two could be critical for the success of the Asia-dollar concept. If the
scheme succeeds well in Singapore, there is a strong possibility that it may be
applied in other parts of Asia, and most likely in Tokyo.
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