The Asian Dollar Market

 The key distiction between a U.S. dollar and its European or Asian counterpart lies in geographical location：Eurodollars are U.S.dollars placed in Europe; by the same token, Asian dollars are U.S.dollars placed in Asia.

The reason why an Asian dollar market developed has to do with the time-zone difference between London, the main center of Eurocurrency operations, and the Asia-Pacific region. It is important to note at the outset that there is only one market in external dollars centered at London and that the regional center of the London market in Asia exists mainly to conduct business when the main market is closed. It could literally be said, therefore, that the sun never sets on the U.S. dollar. When the London market is closed, the Asian dollar market is open; when the Asian market is about to be closed in late afternoon, the London market has just opened.

The time-zone factor, however, does not explain why, of all places in the Asia-Pacific region, Singapore was chosen as the base of Eurocurrency operations in Asia. Hong Kong, after all, is only half an hour ahead of Singapore time. While Singapore has certain other advantages, relating to its strategic location, its excellent communication and tele-communication facilities, its traditional role as a leading entrepot of the area and the historic stability of its government and currency, these advantage hold just as well for Hong Kong.

The real reason why Singapore was eventually chosen over Hong Kong as the chief center of Asian dollar operations had to do with certain key incentives provided to the functioning of the market by the Singapore government, incentives that the Hong Kong government was unwilling or unable to provide.

It was around March 1986 that a debate was launched in international banking circles as to whether Hong Kong or Singapore should be chosen as the main center of Asian dollar transactions. For reasons mentioned above, Hong Kong as the first choice, but the Hong Kong government was not willing to exempt the 15 percent interest-witholding tax on offshore currency transactions. The Hong Kong authorities argued that Hong Kong was already offering the lowest tax burden in Asia to foregin business and that any further tax concession would seriourly erode government revenue in a traditionally low-tax country.

Apart from Hong Kong, Tokyo was considered a possible base for Asian dollar operations, but the Japanese government refused to budge on its historically tought exchange control regulations. Such regulations included an interest-witholding tax on nonresidont holdings of foregin currency in Japan, artificially low interest payments on foregin currency deposits and free yen accounts, high reserve requirements for banks, and other controls over bank loans to foreigners. Such controls were designed primarily to prevent the inflow of speculative funds into Japan, thereby putting upward pressure on the yen, which in turn could jeopardize Japanese exports. Because the cost of borrowing in the Eurodollar or Asian dollar markets is not substantial for Japanese customers, the Japanese government saw little benefit to be derived from establishing an offshore capita market in Tokyo.

On the other hand, the Singapore government, in its eagerness to make Singapore a leading finacial center in the wake of British withdrawal from the island in 1968, was willing to abolish certain key taxes, including the most important concession of all: exemption of interest-withholding tax on Asian dollar deposits. The decision of the Singapore authorities to alter the tax laws to enable the market to operate out of Singapore reflected both an immediate desire to earn "invisible"income on financial services with a view to improving the country's balance of payments and a more long-range policy of diversfying the island's economy from its traditional reliance on entrepot trade to making Singapore a major finacial center. The government of Singapore took the sensible view that, lacking a natural resource base, Singapore as an island city-state could only rely on service-oriented industries.

Bank of American petitioned the Singapore authorities in 1968 for the establishment of a separate offshore dollar unit in its corporate finanve division, which would borrow nonresident foregin currency and lend it elsewhere. On October 1, 1968, the unit was authorized to start operations with a $200,000 deposit base. Later in 1969, First National City Bank, the Overseas Chinese Banking Corporation, the Chartered Bank, the United Chase Merchants Bank, and the Hong Kong and Shanghai Banking Corporation obtained permission to operation in the market in Singapore.