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6. Policy Recommendations on How to Strengthen
Financial Cooperation in Asia
Wang Tongsan
Institute of Quantitative & Technical Economics
Chinese Academy of Social Sciences
－198－
Since the “Chiang Mai Initiative” was endorsed in May 2000, the currency swap
mechanism in the limited ASEAN countries has been expanded to all member states in
ASEAN, and now has a capital of one billion USD. Meanwhile, financial cooperation in
Asia has been further strengthening after the members of “ASEASN + 3” agreed on the
framework of basic principles in the “Chiang Mai Initiative”, and substantial progress
has been made on currency swap in bilateral negotiations. However, generally speaking,
financial cooperation in this region has just started with many more issues to be
addressed. Here I would like to focus on the tendencies and policies for the cooperation.
I. Necessity and difficulties of financial cooperation in Asia
Countries in Southeast Asia and other parts of Asia were trapped in the same
difficult situation when the Asian financial crisis broke out. These countries, under the
pressure of the consequences of the crisis, made every effort to find a way out. In
January 1999, the European Economic and Monetary Union was officially established,
marked with the launch of the single European currency – the Euro, and it therefore
became a model of regional economic and financial cooperation. Under such
circumstances, Asian countries in general realized the urgent need for regional economic
and financial cooperation.
First, the strengthening of regional economic and financial cooperation in Asia
will contribute to national economic development. Being export-oriented in their
development strategies, the economic development of most Asian countries is affected
by the external environment. Today, when the rich labor resource is still a comparative
advantage of many Asian countries, if export goods from these countries compete with
each other without any regional economic division and coordination, hostile
competitions will deteriorate their trade conditions, and lead to a scramble for deflation
of national currencies or tremendous trade deficit with great economic fluctuation (see
table1). More financial cooperation within the region will enhance its capability to tackle
the impact of external economic fluctuation.
－199－
Table1
GDP Growth Rate
Year
1980
1990
1991
1992
1993
1994
1995
1996
1997
World
1.9
2.3
1.1
1.6
1.3
2.9
2.6
3.3
3.9
China
7.8
3.8
9.2
14.2
13.5
12.6
10.5
9.6
8.8
Japan
2.8
5.1
3.8
1.0
0.3
0.6
1.5
3.9
0.8
South Korea
-2.7
9.5
9.1
5.1
5.8
8.6
8.9
7.1
5.9
Indonesia
8.7
9.0
8.9
7.2
7.3
7.5
8.2
7.8
4.9
Philippines
5.1
3.0
-0.6
0.3
2.1
4.4
4.7
5.8
5.2
Thailand
5.2
11.2
8.6
8.1
8.4
8.9
8.8
5.5
-0.4
Malaysia
7.4
9.6
8.6
7.8
8.3
9.2
9.5
8.6
7.8
Singapore
9.7
9.0
7.3
6.2
10.4
10.5
8.7
6.9
7.8
Vietnam
5.1
6.0
8.6
8.1
8.8
9.5
9.3
8.8
Laos
6.7
4.1
6.9
5.9
8.2
7.0
6.9
6.5
Kampuchea
1.2
7.6
7.0
4.1
4.0
7.6
7.0
1.0
Brunei
-7.0
2.7
3.6
-1.0
-4.1
1.8
2.0
2.6
4.0
Sources：《International Statistical Yearbook 1999》，China Statistics Press，1999;www.cei.gov.cn。
1998
Unit：％
1999
7.8
-2.5
-6.69
-13.01
-0.76
-10.17
-7.37
0.40
7.1
0.2
10.66
0.31
3.17
4.16
5.80
5.35
In addition, with regional economic development and accelerating process of
industrialization in many countries, trade and investment activities within Asia are
shooting up and substantially strengthening the economic links within the region. If
financial cooperation is to stabilize the exchange rates of national currencies and reduce
the risk of exchange rates, it will enhance economic exchanges among the member
countries and their respective economic development. Therefore the strengthening of
financial cooperation in Asia has enormous potential benefits.
Secondly, more financial cooperation is necessary in Asia for economic
integration. It is an important aspect of achieving economic stability and prosperity in
Asia, and is closely related to other areas of cooperation within the region. The success
of Asian financial cooperation will speed up the process of economic integration.
Thirdly, the strengthening of financial cooperation is necessary for more regional
independence. At present, the increasing pace of economic globalization has made
international economic and financial situation more complicated. International financial
system is dominated by the Western countries, the United States in particular, and the
World Bank and the International Monetary Fund (IMF) are under its direct control.
Most of the major international financial speculators and hedge funds are based in the
United States. The development of the financial sector in Asia is well behind that of the
Western countries in terms of supervisory mechanisms, capacity to avoid risks, speedy
access to information, and qualifications of professionals. Therefore, Asia is in a less
advantageous position in financial liberalization and globalization, and Asian countries
should establish a certain cooperative mechanism to enhance regional independence.
Fourth, it is necessary to strengthen Asian financial cooperation in order to cope
with a potential financial crisis. The experience of Asian financial crisis has shown that
financial cooperation in this region is crucial. Under present conditions, if a financial
crisis emerges in one country, which that country cannot handle alone, it has to resort to
－200－
the help from the IMF that will attach harsh terms to its aid. These terms usually invite
an economic recession in the crisis-hit countries, and therefore it is necessary to establish
an effective mechanism of financial cooperation within the region to prevent such a
situation from happening.
Fifth, strengthening financial cooperation will provide remedies to the
deficiencies of the present international monetary system. The major problems of the
present international monetary system are the dominating position of US dollar and the
US monetary policy, which gives first priority to or even sole consideration of economic
balance within the United States instead of a global balance. Given that the present
system is short of providing an effective institution to coordinate monetary relations and
economic policies of different countries when the US dollar is the dominating currency
and the U.S. is not capable or not willing to operate effectively, the strengthening of
financial cooperation in Asia will help coordinate monetary relations and economic
policies in Asia as well as provide a remedy to the shortcomings of the international
monetary system.
Enhancing financial cooperation in Asia is much more difficult than to do so in
Europe. The European cooperation can be traced back to their common cultural,
religious and political traditions, while such similar traditions have not occurred in Asia.
The Asian financial cooperation is now faced with the following major difficulties.
First, there are the institutional and cultural differences. There are two social
systems in Asia, namely socialism and capitalism. Though Asian countries all belong to
an oriental culture, some are more exposed to western influences than others, and the
religions are very diverse. People in East Asia believe in oriental religions, for instance
Buddhism, Confucianism, Islam and Hinduism. Because of their different doctrines,
people would approach an issue from different perspectives and with different methods,
and therefore they somehow stand divided about financial cooperation.
The progress of regional financial cooperation means that countries have to
partially give up some sovereign rights in making monetary and other internal economic
policies. The fundamental reason of slow progress of the Asian cooperation is the lack of
mutual trust among Asian countries due to the diversity of historical, cultural and
political systems, and their difference, divergence and conflict of interest in international
political and economic relations. No country is willing to make any concession on
sovereignty, but the concession on sovereignty is the foundation of any institutional
economic cooperation, financial and monetary cooperation in particular.
Second is the restraints of historical elements. During the Second World War,
Japanese invasion of Asian countries left deep trauma in the heart of the people and the
memories do not fade. There are many criticisms and complains about the attitudes of
Japan politicians on this matter.
－201－
Third is the tremendous economic disparity. According to a recent theory of
regional monetary cooperation, the optimal currency area theory (OCA), several factors
constitute the foundation of regional monetary co-operation; a similar economic system,
similar level of development, similar economic structure and free movement of
production factors. Only when such similarities are available, regional economic and
financial cooperation will be able to ensure the benefits of all parties when the region is
attacked. Otherwise, conflicts of all kinds may occur in trade policy, macro economic
policy and exchange rate policy within the region, and the cooperation could easily be
aborted.
1) The levels of development in Asia are different (see table 2, table3). Countries are in
different phases of development: developed, preparatory stage towards industrialization,
and developing. In terms of economic size, the GDP of Japan is 2300 times as big as
Laos; and GDP per capita in Japan is over a hundred times bigger than Cambodia. Take
GNP per capita in 1999 for example, 32,230 USD for Japan, 23,520 USD for Hong
Kong, 780 USD for the mainland China and only 370 USD for Viet Nam.
Table 2 GDP per capita, PPP
(current international US$)
China
1975
1980
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
273.41
465.00
839.22
967.32
1,150.58
1,329.49
1,360.45
1,400.48
1,539.26
1,808.51
2,073.03
2,347.65
2,681.39
2,940.46
3,154.45
3,342.06
3,617.49
Japan
5,955.11
9,885.13
13,078.61
14,373.38
16,151.15
18,120.88
18,879.82
19,912.55
21,008.61
21,956.86
22,374.56
22,809.34
23,725.34
25,115.12
25,372.60
24,314.20
24,897.77
Korea,
Rep
1,612.74
2,988.49
4,791.51
5,667.71
6,746.57
7,825.94
8,195.14
8,922.51
9,846.77
10,695.88
11,391.30
12,414.14
13,758.83
14,705.68
15,306.51
14,096.74
15,712.40
Hong
Kong
3,234.14
6,896.08
9,729.72
11,473.57
13,938.72
15,841.42
16,059.19
16,665.22
17,697.85
19,387.96
20,310.40
21,440.02
22,166.28
23,330.44
23,564.78
21,263.85
22,090.09
Singapore
2,855.64
5,893.85
7,601.73
8,382.22
10,139.27
11,578.21
12,168.60
12,842.70
13,733.93
14,536.94
16,796.77
18,073.90
19,405.90
20,184.15
20,546.73
19,510.70
20,766.74
Sources：www.cei.gov.cn。
－202－
Thailand
809.06
1,482.35
2,071.72
2,320.66
2,710.08
3,200.18
3,514.02
3,863.22
4,220.78
4,716.24
5,136.45
5,613.09
6,259.91
6,714.93
6,575.10
5,847.50
6,132.31
Malaysia
Indonesia
Philippines
1,277.75
2,412.18
3,279.89
3,446.60
3,811.21
4,285.24
4,534.60
4,762.75
5,233.22
5,793.71
6,291.46
6,806.14
7,491.28
8,140.84
8,573.49
7,660.97
8,208.66
468.14
871.05
1,244.43
1,433.05
1,601.54
1,699.30
1,816.73
1,959.60
2,134.37
2,339.57
2,496.27
2,649.87
2,910.95
3,119.64
3,217.82
2,791.11
2,857.40
1,469.44
2,459.36
2,434.61
2,629.13
2,909.89
3,204.37
3,340.61
3,367.68
3,298.75
3,319.52
3,370.42
3,460.64
3,633.24
3,758.81
3,871.46
3,706.44
3,805.06
India
464.40
671.81
919.28
1,014.62
1,132.64
1,298.57
1,355.90
1,415.78
1,424.62
1,533.56
1,607.90
1,720.97
1,871.22
1,988.71
2,039.02
2,110.33
2,247.62
Table 3 Trade as percentage to GDP
(% of GDP)
China
Japan
1970
3.68
20.33
1975
8.40
25.55
1980
15.48
28.28
1985
24.10
25.54
1986
26.54
18.74
1987
27.32
17.56
1988
27.18
17.79
1989
26.24
19.78
1990
31.85
20.65
1991
35.52
18.73
1992
37.46
17.88
1993
35.67
16.31
1994
48.77
16.44
1995
45.68
17.31
1996
39.90
19.33
1997
41.38
20.93
1998
39.21
20.25
1999
41.26
19.10
Sources：www.cei.gov.cn。
Korea,
Rep.
37.47
63.28
74.43
66.05
68.44
71.62
67.94
61.95
59.35
57.72
56.79
55.03
56.79
61.88
63.12
70.47
85.45
77.37
Hong
Kong
181.49
163.75
180.65
208.64
214.40
234.76
256.70
254.85
260.08
270.73
280.62
274.17
277.89
303.24
285.67
268.45
256.97
261.15
Singapore
Thailand
Malaysia
231.59
302.52
439.03
338.00
333.15
370.41
406.75
394.55
397.02
375.67
361.01
354.67
331.36
338.82
327.26
-
34.40
41.35
54.48
49.16
49.17
57.23
67.41
72.41
75.78
78.47
77.95
79.38
82.35
90.31
84.71
94.47
101.28
102.20
78.72
85.56
110.96
103.17
104.95
111.92
122.62
136.69
146.96
159.31
150.61
157.94
179.91
192.11
181.77
185.67
208.59
218.25
Indonesia Philippines
28.42
45.03
54.39
43.04
39.14
45.26
44.87
45.69
49.06
49.90
52.85
50.52
51.88
53.96
52.26
55.99
92.90
61.84
42.62
48.13
52.04
45.85
48.68
52.90
55.27
58.78
60.80
62.18
63.16
71.17
73.96
80.54
89.81
108.25
110.32
101.38
India
7.72
12.07
15.68
14.18
13.84
14.34
15.55
16.91
17.24
18.07
19.93
21.69
23.14
25.73
25.36
25.60
25.31
27.12
Table 4 Consumer Price Indices.
Unit：1990＝100
Year
1990
1993
1994
1995
1996
1997
1998
China
124
117
108
103
99
Japan
100
106
107
107
107
109
111
South Korea
100
122
129
135
142
148
159
Indonesia
100
129
140
153
165
176
Philippines
100
139
152
164
178
187
203
Thailand
100
113
120
126
134
141
152
Malaysia
100
113
117
121
126
129
136
Singapore
100
108
112
114
115
117
117
Burma
100
213
264
330
384
498
704
Sources：《International Statistical Yearbook 1999》，China Statistics Press，1999。
Table 5 Unemployment Rate
Year
1980
1990
1991
1992
1993
1994
4.9
2.5
2.3
2.3
2.6
2.8
China①
Japan
2.0
2.1
2.1
2.2
2.5
2.9
South Korea
5.2
2.4
2.3
2.4
2.8
2.4
Philippines
4.8
8.1
9.0
8.6
8.9
8.4
Thailand
0.8
2.2
2.7
1.4
1.5
1.3
Malaysia
5.1
4.3
3.7
3.0
2.9
Singapore
3.0
1.7
1.9
2.7
2.7
2.6
Sources：《International Statistical Yearbook 1999》，China Statistics Press，1999。
①
Registered Unemployment Rate in Urban Areas.
－203－
1995
2.9
3.2
2.0
8.4
1.1
2.8
2.7
1996
3.0
3.4
2.0
7.4
1.1
2.5
3.0
Unit：％
1997
3.1
3.4
7.9
0.9
2.5
2.4
2) Differences in industrial structures are very great (see table 6); Similar industrial structures result in
little product diversity. Apart from China and Japan, which have a relatively complete industrial
system, other countries have a rather similar industrial structure.
Table 6
Composition of Gross Domestic Product（
（1996）
）
Unit：％
World
China
Japan
South
Korea
Indonesia Philippine Thailand Malaysia Singapore
Primary
4.3
20.4
1.9
6.3
16.7
20.6
11.0
Industry
Secondary
32.2
49.5
37.9
42.9
43.5
32.1
39.5
Industry
Tertiary
60.7
30.1
60.2
50.8
39.9
47.3
49.5
Industry
Sources：《International Statistical Yearbook 1999》，China Statistics Press，1999.
Burma
Vietnam
12.8
0.2
58.6
27.2
46.2
35.7
10.1
30.7
41.0
64.2
31.2
42.1
3) Financial markets are open to different degrees. The financial markets in Japan and
newly industrial economies are completely open, while most of the others have only
opened their current accounts. Among all financial markets in East Asia, Hong Kong is
the only highly internationalized market, and others confine their markets to national
boundaries. The US dollar market is under-developed in Asia and the level of financial
integration is low.
4) Exchange rate regimes are different. Most countries in this region have a floating
exchange rate system, while China has a regulated floating rate and Hong Kong has a
pegged exchange rate system.
5) Interest rates are deregulated to different degrees. In most countries, interest rate is
liberalized / market-oriented, but China still controls its interest rate.
6) The differences in economic policies are evident. Different levels of development,
national situation, problems and difficulties, and consideration of different factors, all
lead to diverse preferences in economic policies. Just to give an example, Hong Kong
follows a liberal economic policy of high openness, and Japan is more inclined to a
protective economic policy, and in Taiwan polices are implemented to foster economic
liberation and competition of small and medium-sized enterprises. Korean tradition is to
organize large enterprise groups and corporation groups.
Table7 Average Annual Interest Rate on Deposits
1980
1990
1993
1994
1995
1996
1997
China
5.4
8.64
10.98
10.98
10.98
7.47
5.67
Japan
5.5
3.56
2.14
1.7
0.72
0.30
0.30
South Korea
19.50
10.00
8.58
8.50
8.83
7.50
10.81
Indonesia
6.00
17.30
14.55
12.53
16.72
17.26
20.01
Philippine
12.25
19.54
9.61
10.54
8.39
9.68
10.19
Thailand
12.00
12.25
8.63
8.46
11.58
10.33
10.52
Malaysia
6.23
5.90
7.04
4.94
5.94
7.08
7.78
Sources：《International Statistical Yearbook 1999》，China Statistics Press，1999;www.cei.gov.cn.
－204－
1998
3.78
0.30
13.29
39.07
12.11
10.65
8.51
Unit：％
1999
2.25
0.12
7.95
25.74
8.17
4.73
4.12
Differences in these economies create divergence in regional economic and
financial cooperation, in their objectives, and in their gains and losses from cooperation.
All these constrain the advance of Asian financial cooperation.
Fourthly, there is no leadership towards regional financial cooperation in Asia.
The success of European monetary integration is attributed to a strong and stable
Germany with a strong and stable German mark. The increasing Japanese trade and
financial power has given a fast rise to its status in foreign trade and financial transaction,
and Japan is replacing the U. S. as the core and dominating force in economic, trade and
financial activities in East Asia. East Asian countries are highly dependent on Japan in
foreign trade and financial transaction, but the exchange rates of their currencies are
closely related to the US dollar. Under such a regime, the yen fluctuates rather
substantially against the dollar. Moreover, although Japan is the largest economic power
in Asia, its GNP accounts for 14% of the world output as a whole, a size bigger than
ASEAN, China and South Korean combined, the Japanese yen is not internationalized
enough to compete with the US dollar, and not as strong as German mark before the
launch of the Euro. In international trade and financial transactions, the use of the yen is
relatively small. On top of these factors, the Japanese economy remains sluggish, and the
yen is still not stable with no evidence of improving. Thus the leadership for Asian
financial cooperation is not apparent.
14%(G
Japan’s GNP
accounts for
Figure1 Japan being the largest economic power in Asia, but the Japanese economy remains sluggish, and the yen is
still not stable with no evidence of improving.
－205－
II. Policy recommendations for strengthening regional financial cooperation in Asia
1. Steady promotion of regional trade liberation and economic integration in Asia
Trade liberation and economic cooperation are the foundation of financial
cooperation. And the degree of liberalization and the level of cooperation determine the
depth and scope of financial cooperation. In the long run, the in-depth financial
cooperation in Asia demands a steady promotion of trade liberalization and economic
integration.
On November 6, 2000, China-ASEAN Free Trade Agreement was reached in
Brunei, proposing a free trade zone in ten years, a medium and long-term target. In ten
years time, an enormous market of two billion people will emerge in China and ASEAN
combined. The establishment of China-ASEAN free trade zone will lay a good
foundation to promote free trade and economic integration in Asia at large.
The agreement is a good beginning, and more Asian economies should be
included, particularly Japan and South Korea being put in the first list. Later the process
of economic integration can be gradually worked out to establish an Asian economic
community. Of course, the idea of an Asian economic community is a long process
during which there will be many unexpected problems and difficulties to be further
studied.
The development of a regional capital market in Asia is an important component
of promoting economic integration in Asia. Asian countries usually use indirect
financing and have high savings rate and enormous foreign exchange reserves, but there
are few large capital markets, particularly long-term bond markets and no rating
institutions. To avoid economic fluctuations caused by large-size incoming or outgoing
of capital, Asian countries should work together to establish integrated bond markets and
capital markets.
Moreover, Asia should enhance rational flow of labor focusing on free
movement of technical professionals.
2. Strengthening cooperation on financial supervision in Asia.
To maintain its financial stability, Asia should strengthen cooperation on
financial surveillance in the region by establishing a set of rational procedures to
supervise and promote the stability of financial systems in Asia. Asia should also
strengthen cooperation with international surveillance bodies to supervise every
financial system and every legislative and supervisory system within Asia. National
government agencies responsible for the stability of their financial system should
exchange information, and coordinate and implement policies to enhance the stability
and reduce risks of their financial system.
－206－
3. Strengthening mutual support of national central banks and maintaining
exchange rate stability
To this end, dialogue, coordination and cooperation should be strengthened in
financial, monetary and fiscal policies, and the exchange of data and information on
capital flow should be better carried out. In addition, an Asian currency swap
mechanism should be designed under the framework of ASEAN + 3. In May 2000,
financial ministers from the “ASEAN + 3” countries agreed on the “Chiang Mai
Initiative” in Chiang Mai, Thailand, during which a currency swap agreement was
reached by ASEAN, China, Japan and South Korea, making a substantial progress in
regional financial cooperation. Currency swap mechanism is a bilateral agreement under
which when member states are attacked by currency speculators or face crisis in
balancing international revenue and expenditure, other countries are obliged to swap the
attacked currencies with hard currencies to keep exchange rate stable. However, with the
absence of an independent Asian Monetary Fund (AMF), this mechanism remains a
loose cooperation between national central banks and ministries of finance. The size of
the swap scheme should be expanded gradually in the years to come, and currency
trading should be enlarged by improving the direct foreign exchange market for Asian
currencies and establishing a liquidation system.
4. Enhancing exchanges and training of personnel
Exchanges and training of personnel should be strengthened to facilitate financial
cooperation between Asian countries. If unified standards for supervising and regulating
by governments are to be applied, long-term training is required. An Asian human
resource development fund may be put in place to enhance training and encourage the
flow of personnel.
5. Combining financial cooperation and promotion of free trade
Trade liberation and regional financial cooperation are interactive and reinforce
each other, and regional financial cooperation will promote trade liberation in the region.
The Euro zone offers a good example of interaction between trade liberation and
regional monetary cooperation. Accelerating the pace of the development of a free trade
area in Asia and reducing trade barriers may create the preferable conditions for more
in-depth financial cooperation, which may in turn cut down transaction costs, and
therefore facilitate free movement of production factors and trade liberation. From the
perspective of micro economic benefits, regional financial cooperation will contribute to
stabilizing exchange rates and reducing transaction costs in currency exchanges, and
bring about the growth of trade and output within the region. From the perspective of
maintaining macro economic stability, the reduced risk of exchange rates will bring
down the fluctuation of output, price and other macro economic variables, and therefore
speed up economic growth.
On the other hand, financial cooperation is the basis of economic cooperation.
Financial and monetary cooperation will go into deadlock without the cooperation in
trade, investment and technology transfer. Meanwhile, since financial and monetary
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cooperation have more overall importance (it may affect national economy as a whole)
than that of trade, investment and technology transfer, and are more sensitive (related to
national sovereignty), economic and trade cooperation should be pursued first. As the
Asian economic integration accelerate with the expansion of the ASEAN free trade zone
and enhanced cooperation in trade, free investment and technology, cross-border trade
barriers will be removed, trade will be freer and financial and monetary cooperation will
move forward. At the same time, regional monetary cooperation will also help to offset
the external negative impact on national macro policies, and therefore enhance trade
liberation and economic integration.
The history of regional economic cooperation shows that the establishment of a
free trade area usually precedes financial and monetary cooperation, but in Asia, the
pace of financial and monetary cooperation was accelerated in a period after the crisis
and then slowed down in the recent couple of years. The European cooperation started
with European Coal and Steel Community, and then moved to the fields of trade, finance,
etc. The Asian financial and monetary cooperation after the crisis has played a positive
role in economic cooperation in the region.
III. The tendency of financial cooperation in Asia
After the Asian financial crisis, East Asian countries have realized the urgency
and necessity of strengthening financial cooperation in the region. The launch of the
Euro in 2000 has greatly stimulated the enthusiasm of financial cooperation in Asia. A
single currency zone is the highest level of region cooperation and it should also be the
ultimate goal of Asian regional cooperation.
Professor Robert Mundell, Nobel laureate of economics in 1999 and “the father
of the Euro”, predicted (2000) that in the next ten years there would be three areas of
single currency: the Euro zone, the US dollar zone and the Asian dollar zone, i.e. “three
stability islands”. In his recent lecture in Peking University, Professor Mundell
suggested that Asia establish a single Asian currency by drawing on the European
experience of launching the Euro. He also warned that it would be a long process and
would not be achieved in a short period of time.
The Euro zone and the US dollar zone are developing rapidly, while the
monetary cooperation in Asia is still in the phase of discussion and exchanges of views.
If in ten years time or longer, an Asian dollar zone appears, Asian countries will benefit
from a more fair international currency system. A single Asian currency will not only
reduce transaction costs and enhance free movement of production factors, but also
bring about political benefits to all countries in the region. More economic dependence
contributes to regional security, and more cooperation enlarges the role of Asia in
international affairs. In addition, with the US dollar dominating the present international
monetary system, the set-up of a single Asian currency zone together with the existing
Euro could weaken the monopoly of the US dollar.
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According to the OCA theory, the following conditions must be satisfied to build
a single currency zone. First, there must be a common monetary policy to coordinate
countries and regions within the zone, and therefore to ensure the possibility of fiscal
transfer, highly integrated financial market and free movement of labor. Secondly, there
must be a similar economic structure and level of development. Only under such
circumstances, can external impact on any country or region in the zone be symmetrical,
and can the cost of single monetary policy to offset external impact be reduced. Third,
there must be a common policy target. The foundation of a single currency is economic
and financial cooperation and integration, which is a long and complicated historical
process. Even though the EU countries have many things in common in politics, culture
and religion, and a similar level of economic development, it took them almost half a
century of long efforts and cooperation to reach the “clauses of convergence” and
complete this process.
Now there are unfavorable elements in establishing a single Asian currency in
East Asia due to disparity of economic development, diverse political and economic
system, and lack of political consensus on the Asian dollar. The OCA theory and the
practice of the Euro zone suggest that there are some obstacles in establishing a single
Asian currency: the absence of the foundation of political integration, low economic
development level and economic disparity among Asian countries, and the absence of a
core currency in Asia.
There will be long road before a political consensus is reached among Asian
countries to create a single Asian currency. However, they have realized the importance
of strengthening economic and financial cooperation in the region, which implies that a
good foundation is already available for such cooperation. The rapid trade growth within
East Asia has helped it gain some strength of self-support and independent development.
Now East Asian countries are steadily carrying forward monetary cooperation under the
framework of “ASEAN + 3”. At the annual meeting of the Asian Development Bank
(ADB) in May 2000 in Chiang Mai, Thailand, the ten ASEAN countries, China, Japan
and South Korea reached a currency swap agreement. At a recent international
symposium in Hong Kong, Dai Xianglong, the governor of the People’s Bank of China,
proposed that central banks in East Asian countries strengthen cooperation in financial
surveillance and liquidation, and make joint efforts to establish an Asian bond market.
These initiatives for cooperation will ensure the stability and prosperity in Asia.
Regional cooperation and integration is inevitable with advancing economic
globalization. Nevertheless, Asian countries have a long way to go to create a single
currency against such a diverse political and cultural background and economic
disparities. In the long run, with the deepening of economic integration and monetary
cooperation, Asian countries will ultimately make earnest efforts towards such a goal.
Based on the current situation of regional financial cooperation and political and
economic conditions, the crusade towards a single Asian currency can be divided into
three phases.
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Phase I: theoretical debate and program design of a single Asian currency to be
completed by 2010.
Tasks in this phase include
1. To establish East Asian free trade area. On November 6, 2001, China and ASEAN
reached an agreement to establish a China-ASEAN free trade area, but it is far from
sufficient in creating a single currency. There must at least be a free trade area
composing of China, Japan, South Korea and ASEAN, and on this basis new members
should be included step by step.
2. To establish Asian Monetary Fund (AMF). In September 1997, at a meeting of the
IMF and the ADB, the Japanese government proposed establishing the AMF consisting
of Japan, China, Korea and ASEAN. This idea, to a certain extent, reflected the strong
discontent of Asian countries against the IMF in handling the Asian financial crisis.
Soon after the proposal, it was opposed by the U. S. and the IMF, and therefore came to
a deadlock. In the discussion on Asian financial cooperation, the issue of the AMF was
heatedly debated and resulted in no consensus, but the establishment of the AMF is
critical for Asian economic cooperation and integration.
3. To promote a study of a single Asian currency, including theories, feasibility studies,
its impact on national politics and economy, comparative studies of single Asian
currency and the Euro.
4. To design the specification of the Asian dollar, for instance the boundaries of the
Asian dollar zone, value, implementation procedures and other issues.
5. To promote monetary cooperation under the framework of “ASEAN + 3” and to
establish a certain mechanism of financial cooperation in Asia. In May 2000, ten
ASEAN countries, China, Japan and South Korea reached Regional Currency Swap
Agreement, and in August of the same year the central banks of these countries
expanded the size of the multi national currency swap scheme from two hundred million
to one billion US dollars. The “Chiang Mai Initiative” has become a historical milestone
in the monetary cooperation in Asia. However, a stable mechanism of economic and
financial cooperation is not yet available in Asia, and to tackle a potential financial crisis,
such a mechanism must be put in place as soon as possible. This is also a necessary step
towards a single currency.
6. To strengthen the coordination of national monetary polices. This is not only a request
to stabilize financial situation in Asian countries, but also an important component of the
cooperation.
Phase II: Transitional and preparatory period for a single Asian currency to be
completed by 2030.
The preparation includes
To establish a big integrated market, for instance integrated capital market and labor
market.
1. To strengthen international economic cooperation to bridge national economic
disparities and to achieve economic convergence.
2. To continue Asian monetary cooperation and to establish Asian monetary system.
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3. To strengthen international coordination of financial, monetary and economic
policies, and the cooperation of national central banks to establish a mechanism to
coordinate and supervise economic policies.
4. To establish an Asian Central Bank and related agencies.
5. To define the legal framework of an Asian single currency.
Phase III: Final state of establishing an Asian single currency after 2030.
1. The launch of the Asian dollar and the establishment of the Asian economic and
monetary union. The timetable is to be determined according to the circumstances.
2. The Asian Central Bank will be responsible for stipulating and implementing the
policies of the single currency.
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