Global Trends by Martin Khor

Monday 20 December 2004

Moving towards East Asian monetary cooperation

Blurb:   Much of the discussion on East Asian integration has so far focused on trade.  The East Asian Forum held in Kuala Lumpur also highlighted the need for regional financial and monetary cooperation.  The launching of an Asian bond last week was a small but significant step in that direction.

With global currencies like the US dollar, the euro and Japanese yen continuing to swing sharply against one another, a small but significant move was made last week to make Asian countries less dependent on the international financial markets.

On 16 December, an Asian bond fund valued at the equivalent of US$2 billion was launched by Central Banks of East Asia and Pacific countries.  It will invest in bonds denominated in the local currencies of participating countries.

Perhaps not the kind of news that grabs headlines, it is a significant move to make Asian countries more self-reliant in getting loans in the region, rather than depend on global agencies like the International Monetary Fund or Western financial institutions.

The Asian financial crisis of 1997-99 had shown up the dangers faced by countries running out of foreign exchange and having to take on inappropriate policies imposed by the Western-dominated IMF.

Asean governments, led by Malaysia, resolved to increase regional financial cooperation to avoid future crises and create institutions to tap funds in the region.   An idea by Japan to set up an Asian monetary fund as an alternative source to the IMF was knocked down by the United States and the IMF itself.

In the past few years, Asian countries have built up massive foreign reserves, totaling almost US$ 2,000 billion.   Japan has US$ 840 billion, China $515 billion, South Korea $180 billion, Hong Kong $120 billion and Singaporfe $106 billion. 

Much of these reserves are held in US and European assets and institutions.

It has become quite ironic and even ridiculous that Asian-owned funds placed in Western institutions are recycled back as loans to Asian countries and companies.  It is estimated that 57% of the present value of Asian bonds (worth US$223 billion) are held by European and American institutions.

Developing an Asian bond market, in which Asians own bonds issued by Asian countries, is needed to break this cycle of financial dependence.

The Asian Bond Fund 2 (ABF2) launched last week by the Executive Meeting of East Asian and Pacific Central Banks (EMEAP) Group is a step in that direction.  It follows the US$1 billion Asian Bond Fund 1 of June 2003.

The EMEAP members are central banks of Australia, China, Hong Kong, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea and Thailand.

The ABF2 will invest in US$2 billion worth of bonds denominated in the national currencies in eight markets (excluding Australia, New Zealand and Japan).

Two or three billion dollars is a small amount, compared to the two trillion dollars of foreign exchange reserves owned by Asian countries.  But hopefully from the seeds of ABF1 and ABF2, the Asian-owned Asian bond markets will grow rapidly.

The need for regional monetary cooperation was a major theme at the East Asian Forum organized by the Malaysian Foreign Ministry held in Kuala Lumpur on 6 December.

Bank Negara gave a presentation on developing an effective framework for the Asian bond market.      

This framework involves issuance of bonds by government, quasi-government and financial institutions, encourage Asian companies to raise funds across borders, and upgrade regional rating agencies (and not depend only on western agencies).   

Many working groups have been set up and with strong political support the momentum has been building, said Bank Negara.

President of the China Foreign Affairs University, Wu Jianmin, announced that two working groups one on investment of funds in the region, and the other on regional financial cooperation, are being set up under the Network of East Asian Think-tanks (NEAT) that he coordinates.

A paper by NEAT had suggested that “we should explore the possibility of establishing the East Asian Monetary Union and the creation of a single currency as a long term goal.  Meanwhile, efforts should be made to establish an effective mechanism for an appropriate regional exchange rate and step up the development of a regional bond market.”

Also presented at the Forum was a Third World Network (TWN) paper by Yilmaz Akyuz, formerly chief economist of United Nations Conference on Trade and Development (UNCTAD).

Monetary and financial cooperation in East Asia is needed to accompany regional trade integration, argued the paper.  As trade within the region expands, it is important that there be stable exchange rates among the Asian currencies so that trade can be conducted smoothly.

The recent turmoil surrounding the dollar has highlighted difficulties that Asian countries have to manage their currencies on their own, and thus the need for regional cooperation.

“The goals are to reduce fluctuations among the bilateral exchange rates of countries of the region, to prevent beggar-my-neighbour exchange rate policies and intraregional exchange rate conflicts, minimize the likelihood of financial crisis and contain  contagion,” says the TWN paper.

The discussions at the East Asia Forum articulated the need to speed up East Asian trade integration.  However it also highlighted that regional financial and monetary cooperation is just as important, especially in light of the present turbulence in international currency markets.

Malaysia will have a lot to do in that direction when it takes over the leadership of Asean next year.