Monetary ties rest on coordination

July 17, 2006

Leadership and cooperation among governments will be necessary precursors to currency integration in East Asia, according to panelists discussing Asian currency issues.

The panelists were: Kwan Chi Hung, senior fellow at Nomura Institute of Capital Markets Research; Thanong Bidaya, Thai minister of finance; Masahiro Kawai, head of the Office of Regional Economic Integration and a special adviser to the president at the Asian Development Bank; and Toyoo Gyohten, president of the Institute for International Monetary Affairs. Gyohten moderated the discussion.

Gyohten: Interest in financial integration in East Asia was heightened by the Asian currency crisis of 1997. The financial systems of Asian economies were so fragile that they were unprepared for the international movement of short-term funds.

Therefore, finance ministers from the member countries of ASEAN as well as from Japan, China and South Korea reached an important agreement in May to begin joint studies for diversifying currency-swap arrangements, aimed at mutual cash contributions in an emergency, and the issuance of bonds based on a regional currency unit or a basket of currencies.

Thanong: Trade integration has become the most evident aspect of Asian economic integration. Greater exchange-rate cooperation can help foster intra-regional trade and investment through greater stability in the movement of the region's exchange rates. Increased cooperation in monetary policy naturally means some elements of trade-off in policy flexibility, as in monetary policy independence.

Once the gains from exchange-rate stability as well as the costs are clearly identified, then we can begin a proper framework to move toward greater cooperation. Real political will and commitments will be essential in determining the pace of more concrete monetary and exchange cooperation.

Kawai: The ADB established the Office of Regional Economic Integration in April last year to support processes for regional integration in the two fields of trade/investment and currency/finance. In particular, the office is studying what roles the Asian Currency Unit can play.

Gyohten: To create a single currency, governments need to cooperate with each other and take the initiative.

Kwan: In the early stage of the Asian currency crisis, China was hardly cooperative in financial policy formation within the region. But as the Asian currency crisis deepened, China became positive on regional cooperation. It is more positive on the ACU scheme than Japan. The Chinese have learned that the stability of the Asian region is extremely important for China.

Kawai: Foreign exchange reserves in China have kept increasing and domestic liquidity is swelling. The dollar may plunge in value while economic activity in China possibly becomes overheated. Even if the U.S. current-account deficit begins to decrease, the dollar will likely weaken. How should East Asia react to it?

As economic ties between East Asian countries have become stronger, wild fluctuations in the exchange rates between their currencies should be avoided; the yuan should be made more flexible and should appreciate at a faster pace.

Kwan: In July last year, China abandoned its virtually fixed exchange-rate system. Since then, however, the Chinese monetary authorities have given priority to the control of exchange rates over fluctuations. It is apparent, indeed, that the yuan is not flexible enough.

(The Nikkei Weekly July 17 Issue)

Titles of speakers, names of companies, etc., were correct as of the time when the forum was held.