REPORTNEAT WORKING GROUP ON
EAST ASIAN INVESTMENT COOPERATIONWEIHAI, SHANDONG PROVINCE, CHINAJULY 1, 2005

I. INTRODUCTIONNEAT China hosted the Working Group Meeting on East AsianInvestment Cooperation in Weihai, China on July 1st, 2005.
Representatives from 12 NEAT countries (Brunei was absent) attended
the Meeting. Ambassador Wu Jianmin and Professor Yupha Klangsuwan,
NEAT Co-Interim Coordinators, welcomed all participants. Ambassador
Wu Jianmin, Professor John Wong and Professor Makmur Keliat
moderated the discussion, which was candid, practical, and fruitful. The
participants examined the overall situation of East Asian investment
cooperation, identified major favorable conditions and some major
drawbacks, and put forward valuable policy proposals for the further
development of investment cooperation.

II. HIGH TIME TO PROMOTE INVESTMENT COOPERATION

The participants of the Meeting have realized that it is high time topromote East Asian investment cooperation. There are three favorable
factors.

1. East Asia is the most dynamic region in terms of economic
development in the world. Empirical studies and analyses have shownthat investment cooperation grows fastest when economy experiences
rapid development. In this sense, the region is endowed with a golden1

opportunity for investment cooperation.

In the past three decades from 1973 to 2003, global GDP growth rate wasaround 3.5%, but that of East Asia was 5 percentage points higher,
reaching 8.5%. Some forecast says that in the 30 years from 2000 to 2030,
the global real growth rate will be about 3%, while that of East Asia willbe 2.2 percentage points higher, reaching 5.2%.

2. Expanding international trade propels global economy and facilitates
the investment. The trade growth in East Asia has been remarkable.

In 2004, global trade grew by 9.9%, 3 or 4 points higher than the averagerate for the past decade. From 1980 to 2004, East Asian trade grew at
10.4% per year, enlarging its share of the total global trade from 7.7% to18.1%. In 2004, the 10+3 countries’ trade dependence rate reached 40%,
well above the 28% of the Euro zone. In 2003, 54% of the trade volumeof the 13 economies in East Asia was intra-regional. Though it did not yetreach the 64% level of the Euro zone, it exceeded the 46% level of
NAFTA and was 20 % higher than East Asia’s own trade volume in 1980.

3. The recent growth in economy and investment at the global levelprovides East Asia with a good opportunity to play a more important rolein the new round of direct investment expansion.

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After shrinking for 3 successive years, global direct investment finally
had a 6% increase in 2004, totaling US$612 billion. Direct investmentbound for East Asia began to grow as early as 2002 even when global
direct investment was still decreasing. At present, the direct investment inEast Asia is growing fastest in the world and tends to continue themomentum in the further.

III. FAVORABLE CONDITIONSFOR INVESTMENT COOPERATION

The participants have identified the major favorable conditions for East
Asian investment cooperation.

1. East Asian economies are complementary. East Asia has highly
diversified economies, with different levels of development, different
degrees of industrial structuring, and different factor endowments.

In 2003, Japan had the highest per capita GDP of US$ 34,010, whilesome developing countries in the region had less than US$ 200. As for theindustrial structure, East Asia has a highly developed economy of Japan,NIEs, industrializing ASEAN countries and China, and less developed
ASEAN countries. In terms of factor endowments, Japan boasts abundant
capital and advanced technologies, but lacks natural resources and has
costly labor force. ROK has technological edges in some technological3

areas, but shares similar problems as Japan. China has a large reservoir oflow-cost labor and huge market potential, but the national economy
develops unevenly across regions and sectors. Indonesia and other
Southeastern countries are endowed with rich mineral resources, which
are to some extend underexploited due to insufficient capital input.

2. There is ample capital. Economic growth goes hand in hand withsignificant growth in income. East Asians tend to save money and East
Asian nations hold huge foreign reserves. Thus, ample capital is aconspicuous feature of the region.

The savings rate in East Asia is quite high. In 2003, the savings rates ofSingapore, Malaysia and China are respectively 45.7%, 41% and 37.6%.
These figures suggest people in the region have a lot of money. TakeChina as an example. In China’s Yangtze River Delta area the money heldby people is estimated to be about US $300 billion and in China’s
Guangdong Province alone the estimated number is US$200 billion.
Currently, the foreign reserves of East Asia is about US$2300 billion,
which accounts for 2/3 of the world’s total. Much of the money is spent
on US treasury bonds. It is perhaps a reasonable way to keep money. Butthe yield is low. Moreover, it makes East Asia more vulnerable to thedepreciation of the US dollar. On the other hand, some East Asianeconomies, the less developed ones in particular, have poor infrastructure
and are in urgent need of investment. Some analysis shows that in the4next 5 years, East Asia’s developing members will need US$1000 billion
to fund their infrastructure development. Thus, there is great potential forinvestment in the region, where both demand for and supply of capital arepresent.

3. East Asian economic cooperation is dynamic, providing impetus andadvantages for East Asian investment cooperation.

The achievements made so far have been mainly in the fields of trade andfinance. Vigorously promoted is the establishment of various free tradeareas. A great achievement in financial cooperation is the establishment
and expansion of the 10+3 Chiang Mai currency swap system. The
successful launch of Asian Bond Market also marked important progressof East Asian financial cooperation.

IV. DRAWBACKS AND INADEQUACIES

1. Uneven development across areas of economic cooperation and lack ofcoordination. Such uneven development and lack of coordination havebecome serious drawbacks. Trade cooperation in East Asia has been
moving very fast and financial cooperation has followed fairly closely.
However, investment cooperation is lagging behind. Thus to achieve amore balanced development of economic cooperation in various fields,
special attention ought to be given to investment cooperation.
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2. Insufficient institutional capacity. Effective institutions should beenhanced to mobilize funding for investment. The existing institutions,both domestic and regional, should be enhanced and establishment of
new ones may also be an option, such as an East Asian investment bank.
A knowledge-based one is in particular need.

3. Lack of major investment projects. If there were no quality projects,
the money would have no where to go in the region. Investment ininfrastructure is in particular need, not only for faster economic
development, but also for poverty alleviation and for a more balanced andsustainable development in the region.

4. Low level of human resources development. This is a weak link andwill constitute a major drawback, especially for the low-income
developing economies in the region.

V. POLICY PROPOSALS

1. To improve the environment for intra-regional investment, strengthen
the framework of investment cooperation, and enhance policy
coordination of all economies in the region in their efforts of attracting
FDI.

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(1) Improve domestic investment environment including legal systems,
transparency of information, approval procedures, intellectual property
rights protection, and mechanisms for dispute settlement.

(2) Implement the existing bilateral agreements on investment protection.
Discussions on FTAs and intra-regional negotiations should be held inorder to construct an investment framework that will not only promote
the regional economic development but also fully reflect the interests ofall economies concerned.

(3) Set up a system of networks for investment in East Asia. This system
may consist of a network of flow of goods, a network of investment
information, and a network of investment cooperation gardens.

(4) Establish a training center for investment cooperation in East Asia. Itis meant to improve the efficiency of investment administrations, themanagement of enterprises in handling transnational businesses, and thecompetency of human resources in the region.

(5) Upgrade the financial and insurance service systems for investment
cooperation, and make full use of diplomatic resources to facilitate theoverseas investment and transnational operation of enterprises.

2. To organize big projects for investment cooperation, build a pan-Asian7

transportation network and explore the probabilities of cooperation in thefields of environmental protection, agriculture, energy, etc.

Big projects are crucial for successful investment cooperation.
Governments should play a coordinating role and jointly organize andpromote big projects, especially for infrastructure construction. At present,
the priority project can be a pan-Asian transportation network, including apan-Asian railway, pan-Asian highway, and pan-Asian waterway.
Measures should be taken to coordinate the policies of transportation
management so as to form a network of efficient and convenienttransportation systems in East Asia.

3. To develop the Asian Bond Market and enhance investment institutions
for East Asia.

The Asian Bond Market should be developed into a safe, convenient andefficient channel for the investment cooperation in East Asia.

(1) Strengthen the coordination mechanism. The responsibilities of the six
working groups should be expanded, including in-depth analyses ofinfrastructure development, investment opportunities, accounting systems
and information sharing. The Meetings of Finance Ministers and Central
Bank Governors should place this task on top of their agenda. The
development of domestic and regional bond markets should be well8

coordinated.

(2) Expand the size of the Bond Market. The second stage of Asian Bond
insurance should be completed at an early date, with the total amountraised to US$8 billion, so as to increase the investment in regional bonds,especially the bonds issued by governments and financial institutions.

(3) Increase the bond supply. The Asian Development Bank should issue
more bonds denominated in the currencies of East Asian countries or an
East Asian basket currency, so as to facilitate the development of theregional bond market and provide technical assistance for the market.

(4) Enhance information exchange and monitoring. An East Asian rating
agency may be set up for East Asian bond issuance, especially for small
issues and small counties.

(5) Strengthen the role of governments in making more effective use of
the existing institutions and establishing new ones, which may consist ofan East Asian Investment Fund and an East Asian Investment Bank.

VI. CONCLUSION

Investment cooperation is an important part of and great facilitator for
East Asian community building. To promote investment cooperation, East9

Asian nations need to show vision, commitment, and political will so that
we can invest not only in our economic development, but also in peace,
prosperity, and progress.

ANNEX 1: Program of the NEAT Working Group Meeting on East Asian Investment
CooperationANNEX 2: List of Participants

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