NEAT Working Group on East Asian Financial Cooperation

ReportBeijing, China
29 May 2009

Introduction
NEAT Working Group Meeting on East Asian Financial Cooperation was held inBeijing, China on 29 May 2009. NEAT members and experts from 12 of the ASEAN+ 3 countries and the ASEAN Secretariat took part in this meeting (Thailand wasabsent). There were an opening session, four panel discussions, and a wrap-up
session.
Mr. Zhang Jianhua, Director-General of the Research Bureau of the People’s Bank ofChina, delivered a keynote speech at the Opening Session. He briefed the participantson the measures China has adopted in coping with the global financial crisis,difficulties and progress of the implementation of these measures, and the prospect ofChina’s economic growth.
The four panels were:
1. Evaluating Global and East Asian Economic and Financial Situation,
2. CMIM and the Independent Surveillance Unit (1): Operation Details andImplementation Plan,
3. CMIM and the Independent Surveillance Unit (2): Impact on East AsianMonetary and Financial Cooperation,
4. Sustaining Regional Economic Growth and Promoting the Reform ofInternational Financial System.
The meeting examined the aggravating impacts of the economic crisis upon East Asia,
reviewed the recent achievements of the East Asia financial cooperation and put
forward action-oriented policy recommendations.
I. Difficulties: Impacts of Global Financial Crisis
The global financial crisis has exerted considerable impacts on financial stability,
export growth and economic growth in East Asia.
Financial institutions in some East Asian economies have suffered losses; stockmarkets have seen sharp fluctuations; foreign exchange reserves have decreased; andthe bond markets have shrunk. Moreover, export trade in East Asia has witnessed
steep decline due to the shrinking of developed markets and resurging of tradeprotectionism. For instance, China’s export started to grow negatively sinceNovember 2008. In the second quarter of 2009, the growth rates of China’s exportwere respectively -25.7%,-17.1% and -22.6%. East Asian economic growth has
slowed down and even become negative in some countries.
II. Fresh Impetus: Breakthroughs in East Asian Financial Cooperation
Participants commended the latest development in East Asian financial cooperation.
“Action Plan to Restore Economic and Financial Stability of the Asian Region”
adopted at the ASEAN+3 Financial Ministers’ Meeting in February 2009 increased
the total size of the CMIM from US$80 billion to US$120 billion. The ASEAN+3
Finance Ministers’ Meeting on 3 May 2009 reached agreement on all the main
components of the CMIM including individual country’s contribution, borrowing
accessibility, and the surveillance mechanism. It also agreed to implement the CMIM
before the end of 2009 and to establish an independent regional surveillance unit assoon as possible.
On the ABMI, the Finance Ministers’ Meeting in May agreed to enhance the ABMI
Roadmap and endorsed the establishment of the Credit Guarantee and Investment
Mechanism (CGIM) as a trust fund of the ADB with an initial capital of US$500
million. The Meeting also endorsed research activities to promote trade settlement
denominated in local currencies in East Asia and regulation and supervision for soundliquidity risk management for banks.
These significant developments in regional financial cooperation are conducive toregional financial stability, policy coordination and the improvement of theinternational financial system. And more importantly, they have given a fresh impetus
to further regional financial cooperation.
III. Policy Recommendations
Based on the common understanding upon the necessity to strengthen financial
cooperation in East Asia, participants made action-oriented policy recommendations
in a few major areas.
1. Strengthen regional surveillanceFirst, it was proposed setting up an independent regional surveillance unit as soon as
possible. The Finance Ministers’ Meeting in May 2009 agreed to establish an advisory
panel of experts to work closely with the ADB and the ASEAN Secretariat to enhancethe current surveillance mechanism to lay the surveillance groundwork for the CMIM.
However, such a transitional period should not be long. Agreement should be reached
and arrangements be made as soon as possible on the organizational structure andpersonnel makeup. Some participants suggested that a timetable be made with thedeadline in 2010.
Second, it was proposed that the spectrum of the modality of monitoring andsurveillance be widened. The surveillance unit should not only observe economic
indicators, but also assess macroeconomic, financial, and structural policies ofmember countries, pool information, issue early warnings, monitor capital flows, etc.
It could also become an efficient and flexible decision-making mechanism for theCMIM. When the CMIM started to play these functions, the creation of an AsianMonetary Fund would proceed in substance.
Third, it was proposed gradually increasing the IMF de-link portion. For this purpose,the independent surveillance unit has to be in good operation, an assessment model
monitoring the liquidity set up, and a reliable loan security guarantee mechanism
established.
Fourth, regular expansion of the CMIM was proposed for maintaining the financial
stability and meeting the growing needs of economic development.
2. Make use of the CMIM to promote regional financial cooperation
It was proposed that the CMIM could play its due role in promoting all-around
financial cooperation in East Asia after the independent surveillance unit has been setup.
First, an integrated policy dialogue mechanism should be introduced. ASEAN+3
Finance Ministers’ Meeting could be expanded into ASEAN+3 Finance Ministers andCentral Bank Governors’ Meeting; and the independent surveillance unit of theCMIM could organize relevant policy coordination activities.
Second, the independent surveillance unit of the CMIM could promote all-roundcooperation among the financial institutions in this region. An East Asian Financial
Forum or an “Asian Financial Stability Dialogue” could be set up as an all-around
financial cooperative mechanism, participated by central banks and finance ministries,
and financial regulatory bodies.

Third, the CMIM could be used to promote ABMI. At present, self-managed reservethat is contributed to CMIM might be required to purchase sovereign orquasi-sovereign bonds issued by the governments and quasi-government agencies inthis region, which could help stimulate the demand for local bonds and boost thedevelopment of local bond markets.
3. Promote regional economic growth and improve the international financial
systemParticipants proposed that East Asian financial cooperation should be strengthened topromote regional economic growth and improve the international financial system.
It was agreed that ABMI should be enhanced. At this stage, efforts should be made toboost demand for local bonds and to increase the effectiveness of regional bondmarkets, including credit rating agencies.
It was proposed that a fund be set up to facilitate SME financing because the SMEs
face the most severe financial difficulties in global financial crisis. The fund could be
used to assist SMEs by granting loans, organizing trainings on SME financing, andproviding technical support to the financial institutions doing SME credit businesses.
It was also proposed that a regional clearing and settlement system be established toencourage the use of local currencies in regional trade and investment, and financial
cooperation be strengthened to support investment in regional infrastructure.
Participants agreed that the international financial system needs restructuring. The
multilateral and bilateral financial cooperation should contribute to the overall reformof the international financial system, especially in enabling a bigger role of theemerging economies and strengthening surveillance and regulation of the financial
markets.
Conclusion
Facing severe economic difficulties in the global financial crisis, East Asian nations
have realized that our economies are heavily interdependent and only furthercooperation and coordination can produce common good and prosperity. The
ASEAN+3 Finance Ministers’ Meeting made significant progress in furthering
regional financial cooperation. This momentum should be maintained andimplementation and follow-up measures should be studied and taken seriously. With
such efforts, the participants believed that East Asia would recover sooner than otherregions and make great contributions to the restructuring of the international financialsystem.