DP2011-31

Fina ncial Cooperation in East A sia :Its F uture Directions
Wataru TAKA HASHI

November 28, 2011

November 2011
Financial Cooperation in East Asia:
Its Future Directions 1
Wataru Takahashi 2
Research Institute for Economics and Business Administration
Kobe University
Abstract
After looking back the achievements of financial cooperation in Asia, this paper argues
its future direction. Despite recent financial turmoil of “Euro”, the financial integrationin Europe still has the aspects from which we should learn.
The other aspect of the financial integration besides the single currency is todevelop the good market infrastructure at regional scale. In this respect, Euro has
attained good achievement. Financial service has improved much in Europe, which
supports the promotion of trade and investment. In Asia, economic integration has
progressed in trade and production, while cross border financial service is far behind.
There remain many impediments in the financial services. In order to improve them,
the priority should be put on the development of financial infrastructure

Keywords: financial cooperation, the single currency, financial integration
JEL Classifications: F36, F55, O19

1 This paper was originally prepared for a conference held at the Korean Capital Market Institute on

April 28, 2011 in Seoul, South Korea.
2 Research Institute for Economics and Business Administration (RIEB), Kobe University, 2-1,Rokkodai, Nada, Kobe, 657-8501, Japan, Email: wtaka@rieb.kobe-u.ac.jp, Tel/Fax +81-78-803-7005

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Introduction
Today there is a widespread and increasing perception that financial cooperation in
East Asia is approaching a crossroads. The background to this perception is, first,
that cooperation up to now has recorded several major achievements and completed
its first stage, and so it appears that the time has come to move forward to the nextstage. Second, it is felt that if cooperation stalls now, concrete opportunities will belost.
With respect to the achievements thus far, some 13 years after the Asianfinancial crisis, cooperation succeeded in establishing a swap network, theChiang-Mai Initiative (CMI), and its large amount of foreign reserves is commonly
acknowledged to have supported Asian financial markets during the recent global
financial crisis. The promotion of the Asian Bond Market Development by means
such as the Asian Bond Market Initiative (ABMI) and Asian Bond Fund (ABF) also
attained success. The ABF was launched in all the economies of the Executives’Meeting of East Asia Pacific Central Banks (EMEAP), and foreign bonds began to
be issued in domestic markets such as China. As the final target of cooperation, theAsian common currency has been on the agenda since financial cooperation in theregion began. Various proposals have been discussed, and the Asian Currency Unit
has been calculated and published. Discussion of further steps, however, has notprogressed. There is no consensus on establishing a common currency, despite theeconomic integration seen in deepened trade relations.
It is clear that currency risks caused by fluctuations in exchange rates
would be contained by the introduction of a common currency. And even if the region
remained vulnerable to risks outside its boundaries, the member countries of acommon currency would be able to speak with a unified and more powerful voiceoutside the region. History has shown that Europe enjoyed greater influence indiscussions of international financial architecture following its integration. In thecase of East Asia, however, political decisions are required, and thus the region lags
far behind in reaching consensus. Quite recently, the Chinese government’s
movement toward internationalization of the renminbi might reflects frustration
about the slow progress toward a regional common currency (Yu [2011] and Li[2010]).
Thus, financial cooperation in Asia currently faces the problem ofdetermining whether it should accelerate to promote the idea of a common currency.
I would make the argument, however, that there are many things to be done before
moving to a single currency. To facilitate the idea of a common currency, it is2

necessary to improve the market infrastructure. For example, to increase thecurrency’s circulation in cross-border transactions in the region, a stably
functioning payment system is required.
Financial cooperation is required to improve the market infrastructure.
Harmonization of the infrastructure such as the payment system and the legal
framework is very important, since it is a necessity condition for common currency,
The Asian Common Currency: An Impossible Dream?
In addition to differences in terms of monetary policy, there are many differences inthe stages of development, political systems, and so on. Because of this, it issometimes argued that the Asian common currency is an impossible dream.
A look at the region’s history, however, tells us that a common currency inEast Asia is not a new development. For example, in Japan in the 15th and 16thcenturies, both coins minted locally and coins imported from China circulated
widely. Eiraku-sen copper coins from the Ming Dynasty were widely used in Japan
at the time (Picture 1).

(Picture1) Eiraku-sen (Eiraku-tuho)
Chinese Copper Coins, Ming Dynasty
This type of usage occurred not only in Japan but also in other countries
close to China. The pattern reflected the dominant economic power of China inthose days, but it was also the case that Asian economies shared common businesspractices, and thus the regional economy was integrated to some extent.
It has also been argued that contemporary differences in politics, religion,and culture might act to prevent Asian integration. However, ASEAN provides uswith an important counterexample. Despite the diversity in the ASEAN members’
economic development, political systems, and religion, their history demonstrates asolid sense of commitment toward closer relations. On this particular point,
integration appears to be more deeply entrenched in ASEAN compared to Europe.

3Currency Arrangements and Financial Integration
To clarify my argument, I would like to categorize financial cooperation as being of
two types: currency arrangements and financial integration. Policy coordinationsuch as exchange rates and monetary policy fall into the first category. The Asian
common currency and the Asian Currency Unit are also on the agenda. Financial
integration here means capacity building in the Asian financial market. It means
harmonization of financial infrastructure such as payment systems, corporate
governance, legal systems, accounting systems, business rules and other practices.
The two types of financial cooperation are complementary. However, it isbetter

toachieve

financialintegration

first,

since

establishingcurrency

arrangements is a difficult and time-consuming process. This is particularly so inAsia, given the large differences among economies. China’s monetary policy, forexample, is government-regulated, whereas Japan’s is market-oriented. Thus, timeis required for mutual coordination to implement a single policy.
A Two-Track Approach
As ultimately both currency arrangements and financial integration are important,a good strategy would be to adopt a two-track approach, consisting of currency
arrangements and financial integration. With respect to currency arrangements,
the ASEAN+3 Macroeconomic Research Office (AMRO), a regional surveillance unitof the Chiang Mai Initiative Multilateralization (CMIM), was established in
Singapore in March. It is expected to cover both macro policy and financial stability.
Although achieving the Asian Common Currency remains a task for the future, wehave seen a reasonable degree of progress in currency arrangements. By contrast,
despite the ABMI project has begun intensive study of the creation of financial
infrastructure such as a bond market, relatively little progress has been achieved infinancial integration such as the harmonization of infrastructure.
The promotion of financial integration has become increasingly necessary
in the region. Trade and other forms of economic integration in East Asia haveprogressed at a rapid pace. Corporations operates beyond home-country borders.
Free trade agreements have been contracted in the region, and they support suchactivities. In the fields of manufacturing and trade, cross-border activities
experience less friction. By comparison, many impediments remain in the field offinance.
To promote financial integration, it is important to solicit advice from theprivate sector. Since firms and investors are the main players in the market, their4

opinions should be respected by the public sector. Firms require improved financial
services, and it is also important to invite the private sector to promote financialintegration. The private sector could take a leading role in many areas such as
payment, and business rules and practices. This might represent an attractive
business opportunity for the private sector. With the collaboration of the private
sector, financial cooperation could encourage the development of financial
industries in the region. This would be an important objective of economic policy.
As currency arrangements are a task mainly for the public authorities,
much cooperation from the private sector should be invited in capacity buildings forfinancial integration. Some describe the former as a “top-down approach” and thelatter a “bottom-up approach,” more priority should be placed on the latter.
The Experience in Asia
As I mentioned, we have seen positive achievements in the region such as theCMIM and the ABMI/ABF (BIS(2011)). These were promoted after the Asianfinancial crisis that began in 1997. In response to the crisis management, the AsianMonetary Fund was proposed but not realized. Japan then launched the New
Miyazawa Initiative and the regional countries agreed to set up the ASEAN+3, themost influential policy forum of the regional economy. The CMIM and ABMI areprojects of ASEAN+3. 3 Their main concern has been the design of projects to resolve
and prevent such a crisis. But there is too much emphasis on crisis solution andprevention. This might be one reason why financial integration has not progressedvery far in financial cooperation in Asia.
Lessons from Europe
Even after the serious crisis in Europe, we have much to learn from the European
experience of financial integration. The achievement of the euro as a single currency
is well known, but much progress has also been achieved in the financial (monetaryand capital) market.
One of the positive features of financial integration in Europe is its
systemic approach. 4 A clear goal has been set for the single market to provide better
3 The ABF was promoted by the economies of EMEAP and sought to improve market infrastructure. It
introduced the Asian Bond Index to invite foreign institutional investors. By listing on the exchangemarkets, it promoted the standardization of fund trading. The concrete results of the ABF gained
momentum for financial cooperation—another aspect of the success of an Asian bond project such asthe ABF.
4 Kuroda (2000) has asserted that one of serious shortcomings of financial cooperation in Asia is that itlacks a clear goal.

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financial services equally in the region and to draw a clear workload to proceed fromthe beginning. Academics and the private sector have been invited to help set theagenda. The Giovannini report of 1997 (“The impact of the euro on the capitalmarket”) was made public and determined the direction of the project, with thehead of the Group being Dr.Alberto Giovannini of former Professor of Columbia
University. The project proceeded with a financial action plan from 1998 to 2005. In
the course of progress, internal and external reviews were conducted.
It was a major project to conduct the harmonization of many fields such aslaw, accounting systems, and business standards. Many regional projects werebegun. One of the assignments for the European Central Bank involved thepayment system. As part of this, systems such as TARGET, TARGET2, andTARGET2-Securities launched operations.
It should be noted that in the case of TARGET and other systems, somenon-member countries of Euro such as the United Kingdom, Denmark, and Sweden
join the project. This suggests that it is possible to promote a “single market”
separately from a “single currency.”
Although the recent crisis in Greece shows that many problems remain
concerning the euro, it is undeniable that financial integration has brought
numerous benefits. The capital market, for example, has seen reductions in costs
through improved efficiency. A more controversial point is that current accountimbalances have expanded since financial integration. The trade imbalance
between Germany and Spain has rapidly grown after the introduction of Euro. Until
recently a current account balance could be financed smoothly under the single
currency and market.
The crisis demonstrates the necessity for discipline regarding fiscal andexternal balances. But financial integration offers the advantage that the externalbalance can be financed in a smooth and efficient manner.
On the other hand, Europe has also shown us the bitter truth that a single
currency is not a magic wand. Introduction of the euro did not give Europe
immunity to the crisis. This teaches us the simple lesson that policy discipline isrequired to maintain a single currency.
Conclusions
In this paper, I have explored the future directions of financial cooperation in EastAsia. East Asia must move forward to achieve financial integration (singlemarket/market integration) as well as currency arrangements.
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With financial integration, East Asia will be able to provide better financial
services for firms operating cross-border businesses in the region.
It can also invite private initiatives from the financial sector in the region.
This will enhance development in the financial industry.
All of this will promote a single currency, since a smoothly functioning
financial market is the basis for a key international currency.

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