Report

NEAT Working Group on East Asian Financial Cooperation

Beijing
18 April 2007

Introduction
The NEAT Working Group Meeting on East Asian Financial Cooperation was held inShanghai, China on 7-8 April 2007. The participants included scholars and experts
from 12 of the ASEAN Plus Three countries (Brunei was absent). The Meeting
consists of 3 major parts, namely, the Opening Ceremony, Keynote Speeches andPanel Discussions.
Amb. Wu Jianmin, President of the China Foreign Affairs University, chaired theOpening Ceremony. Vice Finance Minister of China, Mr. Li Yong, Executive ViceMayor of Shanghai, Mr. Feng Guoqin and President of the Shanghai Academy ofSocial Sciences, Mr. Wang Ronghua gave speeches on East Asian financial
cooperation and Shanghai’s role in it.
Keynote speeches were given by Mr. Makoto Utsumi, President and CEO of the Japan
Credit Rating Agency, Ltd., Mr. Jusuf Wanandi, Vice Chairman of the Centre forStrategic and International Studies, Indonesia, Mr. Zhumin, Vice President of theBank of China and Amb. Wu Jianmin, the Co-interim Coordinator and President ofthe China Foreign Affairs University.
Panel discussions were conducted in a candid and down-to-the-earth manner, andfocused on 5 major themes:--Assessment of the latest development of East Asian financial cooperation;--Post-Chiang Mai mechanism: objectives and roadmap;--East Asian bond market: domestic building and regional cooperation;--Institution building and risk prevention in regional financial cooperation; and--Other aspects of financial cooperation.

I. Significant Progress in East Asian Financial Cooperation over theLast DecadeParticipants all agreed that significant progress has been made over the last 10 years
in East Asian financial cooperation. Three areas are worth particular mentioning.
1. Swap arrangements were made under the framework of Chiang Mai Initiative.
In May 2000, the ASEAN Plus Three Finance Ministers’ Meeting reviewed the lesson
from East Asia financial crisis and expressed willingness to cooperate in fouraspects—capital flow monitoring, regional surveillance, swap arrangements networkand personnel training. Ever since then, swap arrangements under the CMI have madegreat headway. In 2005, the Istanbul meeting set forth four particular areas to be1

improved. First, the ASEAN Plus Three economic surveillance shall be enhanced andintegrated into the CMI framework. Second, collective decision-making shall beadopted in the system of bilateral swap arrangements. Third, the swap arrangements
shall be expanded in size and shifted from one-way and bilateral cooperation to a
two-way and multilateral mechanism. Fourth, the automatic withdrawing rate shall beraised to 20%. Up to now, progress has been made in increasing two-way
arrangements, expanding swap size and raising automatic disbursement. By the end oflast year, the swap size had reached US$ 79 billion. The participants were also
informed at the Meeting that an important step has been taken toward themultilateralisation of CMI through reserve pooling.
2. Asian Bond Markets have been developing, driven by 2 important mechanisms,
namely, Asian Bond Markets Initiative (ABMI) and Asian Bond Fund.
On 7 August 2003, the ABMI was concluded at the ASEAN Plus Three Finance
Ministers’ Meeting in Manila, and later, six working groups were assigned to study
technical issues. The Executives’ Meeting of East Asia-Pacific Central Banks
proposed in 2002 to set up an Asian Bond Fund (ABF) financed by foreign exchange
reserves. Afterwards, the ABF was issued twice to the amount of 3 billion. This fundhas given impetus to the growth of Asian Bond Market. On the one hand, the scale ofABM has been expanded, with the outstanding volume of local currency-denominatedbonds and outstanding volume-to-GDP ratio up to USD 2,400 billion and 54.2% by
the end of June 2006 from the USD 355.5 billion and 19% in 1997; on the other hand,infrastructure development and institutional innovation have kept moving ahead.
3. Various dialog and coordination mechanisms have been set up, greatly
improving information-sharing and consensus-building.
These mechanisms include the biyearly ASEAN Finance Ministers’ Meeting, theManila Framework Group, the Executives’ Meeting of East Asia-Pacific Central
Banks and the annual Finance Ministers’ Meeting under the Economic Review andPolicy Dialogue (ERPD). In addition, ASEAN has started to build a mechanism for
multilateral information exchange and early warning.

II. Favorable Conditions for Further Financial Cooperation in theRegion
1. East Asia remains the fastest growing region in global economy, which
provides a strong dynamic for further cooperation. In 2006, the region registered aGDP growth of 8% and Southeast Asia alone 5.9%.
2. Intra-regional trade has created an even greater need for financial cooperation.
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Intra-regional trade in East Asia has amounted to over 55% of its total trade volume,
getting closer to that in EU (64%).
3. There is a stronger political will. Leaders of all the economies have repeatedly
voiced their willingness to promote financial cooperation. The agreement reachedamong the ASEAN Plus Three Financial Ministers in Chiang Mai in early April 2007
is a good example for strengthened political commitment, which is crucial for thesuccess of East Asian regionalism at this crucial time.

. Challenges and Difficulties on the Way Ahead
Ten years’ cooperation has pushed forward East Asian regional integration up to a
new stage, which has brought about new challenges as well as new opportunities.
During the discussion, some of the most serious difficulties have been brought up.
1. Some old problems remain unsolved.
1) International catpital flow in East Asia is even bigger in size than 10 years ago
and still lack effective supervision and utilization. According to the IMF statistics,
the total amount of security investment in East Asia’s emerging economies was overUS$ 2 trillion in 2005, more than twice of that in 2001, and with a net inflow of US$470 billion. We have to be alert because it was the reversion of private capital thattriggered the Asian financial crisis 10 years ago. Two major problems, over-liquidity
and over-dollarisation, call for our careful consideration.
2) The financial systems in East Asian nations are still vulnerable and bondmarkets underdeveloped. Banks continue to play a dominant role in regional
financing, but very often inward looking. Housing credit not only makes up a large
percentage of GDP, but also continues to grow at a high speed. Risks are apparent.
Corporate bonds are underdeveloped, firm-level cooperation needs further
strengthening, and the rating and guarantee systems do not serve the region well.
3) The intra-regional exchange rate coordination is still far from adequate.
Before the Asian financial crisis, currencies were under the pressure of depreciation.
And now with serious global imbalances, trade surplus is high in some of the East
Asian economies and some currencies are under the pressure of appreciation.
2. New challenges emerge.
1) Financial cooperation is going on at a relatively low level, lagging behind tradeand investment. The ASEAN FTA and several 10+1 FTAs have established closer
ties among East Asian economies. A vertical supply chain is emerging in East Asia.
However, the increase of mutual bond investment within Asia is slow and the mutual
investment scale small.
32) There is a huge amount of money on the one hand and a lack of intra-regional
investment on the other. By the end of 2006, East Asian foreign reserves reached
US$ 3 trillion, making up 60% of the world’s total. And 65% of East Asian foreign
reserves are kept in the US dollar. Infrastructure alone in East Asia needs aninvestment of US$ 1 trillion in the next 5 years. “Asian money for Asian projects” ismore a hope than a reality. If there should be no effective guarantee and assessment
mechanisms, this situation may well continue into the distant future.
3) Growing global imbalances have incurred serious risks. The trade deficit of theUS and the EU reached 764 billion US dollars and 173 billion euro respectively. Last
year the global foreign exchange reserves tripled that of 1996, amounting to US $ 5
trillion, which caused worldwide overliquidity and the price surge in housing, stocksand raw materials. Pressure from the global imbalances has serious impacts on theregion, but how to use and effectively use the money is yet to have practical solutions.

IV. Policy Recommendations
1. Chiang Mai InitiativeChiang Mai Initiative is a good mechanism that provides the basis for further
institutionalized cooperation. It is proposed that its scale be enlarged, its arrangements
multilaterised, and its functions expanded. Some specific proposals are as follows:
1) The bilateral swap arrangements under CMI should be turned into standby credit
under a multilateral framework and the total credit line should be increased.
2) Research should be done on the conditions for disconnection between automaticwithdrawing and the IMF terms so as to speed up sound decision-making and prevent
financial crises more timely and efficiently.
3) Setting up a unified swap management institution should be considered. For thecurrent stage, discussion should be held within the ASEAN Plus Three framework on
the possibility for transforming the standby credit into an East Asian reserve
cooperation fund.
4) It is suggested that efforts be made to strengthen the functions of CMI on
information exchange, policy coordination and capital flow monitoring. It is desirable
to expand the ASEAN Plus Three Finance Ministers’ Meeting into a meeting ofFinance Ministers and central bank governors, to set up working groups to study how
to improve capital flow monitoring and early warning on risks. Once a more effective
institution is put into operation, it shall make the CMI an efficient cooperation
mechanism for prevention, response and assistance efforts against risks.
42. Asian Bond Market
Efforts to develop the Asian bond market shall be made to strengthen both capacity
and system building within participant economies, as well as the integration of bondmarkets in the region.
Major measures for capacity-building may include: establishing a more effectivesteering body to guide domestic bond markets; perfecting the domestic institutions toprovide a firmer basis for regional cooperation; promoting the development of thebond exchange market and an efficient information exchange system; improving
guarantee and rating systems required in a sound bond market; and improving credit,
taxation and legal environments to create favorable conditions for bond market
development.
Major measures for integration of bond markets may include: reducing barriers incross-border bond-trading in the region; carrying out coordination on legal andsupervision issues relating to bond markets; encouraging cooperation amongsecurities exchanges.
3. Interaction
Cooperation

betweenGovernmental

CooperationandPrivate-sector

1) It is proposed that we establish a Promotion Institution for East Asian Monetaryand Financial Cooperation, to strengthen infrastructure building and institutional
capacity building in the financial service sector, to unify technical and supervisory
standards and to promote cooperation among financial sectors in the region.
2) Governments and governmental mechanisms should facilitate private financial andmonetary operation. On the one hand, each nation should adopt a freer financial
policy in line with the supervision principle of efficiency and stability; on the other
hand, policy barriers restricting regional financial business should be lifted andfirm-level cooperation should be particularly encouraged.
3) It is suggested that governments mobilize private financial institutions andencourage them to participate actively in existing investment and trade cooperation.
Governments shall inform private financial institutions of the latest developments at
the regional level as well as policies on investment and trade integration. Eachcountry shall formulate policies to encourage cooperation among financial
institutions.
4. Asian Currency Unit or Asian Currency Unit Index
An agreement is yet to be reached on this issue. While it is widely believed that an5

Asian Currency Unit could greatly facilitate intra-regional economic and tradecooperation, stabilize the regional currencies, and benefit the nations in the region ingeneral, some suggest that conditions are not ripe for such a unified currency. Despite
the different ideas about it, it is agreed that an in-depth study of the Asian CurrencyUnit Index is of high necessity for the further development of the region and will
provide insight and produce more practical proposals on this issue.
It is suggested that research and planning of the Asian Currency Unit be carried out
and a specialized body designated by ASEAN Plus Three lead this study. It is alsosuggested that Asian Currency Unit is a long-term goal to be realized progressivelyand evolutionarily. In the short term, it is wiser to define the function of this “index”
as an indicator of average foreign exchange fluctuation among currencies in East
Asian nations.
5. Study Groups
It is suggested that study groups be set up to carry out in-depth and strategic study ofcertain key issues, for instance, Asian Bond markets. Theses study groups shall beable to make forward-looking, strategic and practical policy recommendations todecision-makers in the region so that some breakthroughs could be made in realizing
the goal of “Asian money for Asian projects.”

Conclusion
The NEAT Working Group on East Asian Financial Cooperation agrees that financial
cooperation is a crucial part in regional integration process. Over the last decade, East
Asian nations have initiated and carried out regional financial cooperation at variouslevels. These efforts have facilitated the region’s economic recovery and development.
Now East Asia is at a crossroads. The Working Group expressed their optimism about
East Asian regional community building and believed that East Asia is now having thebest opportunity in its modern history for building a peaceful, prosperous, andprogressive regional community. For the realization of this goal, the process of East
Asian regional cooperation shall not lose its momentum.

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