Recent Progress on Regional Financial Cooperation in East Asia

There are three regional groups for East Asian financial cooperation: ASEAN, ASEAN+3, and East Asia Summit.

ASEAN financial integration. Ten ASEAN members are now striving toward economic and financial integration. In 1977 the original five ASEAN monetary authorities created an ASEAN Swap Arrangement with the initial facility of US$100 million, which has grown in size and country coverage over the years. The ASEAN finance ministers, who met for the first time in 1997, introduced the ASEAN Surveillance Process in 1998. Following the adoption of ASEAN Vision 2020, the Initiative for ASEAN Integration (2000), and the Roadmap for Integration of ASEAN (2001), the ASEAN leaders declared ASEAN Concord II (or Bali Concord II) and agreed to establish an ASEAN Economic Community by 2020, a goal that was recently brought forward to 2015. In this context, the finance ministers agreed in 2002 on the Roadmap for Financial and Monetary Integration of ASEAN by focusing on capital market development, capital account liberalization, financial services liberalization, and ASEAN currency cooperation. The Vientiane Action Programme signed at the 2004 ASEAN Summit identified three financial cooperation initiatives: (i) strengthen surveillance mechanisms including the setting up of an early warning system; (ii) enhance domestic financial systems through capacity building; and (iii) develop and integrate financial markets.

ASEAN+3 financial cooperation. ASEAN+3 finance ministers from ten ASEAN countries, PRC, Japan, and Korea, who met for the first time in 1999, have pursued regional financial cooperation in three areas: (i) regional economic surveillance; (ii) regional reserve pooling; and (iii) regional bond market development.³

First, the Economic Review and Policy Dialogue (ERPD), introduced in May 2000, is a regional economic surveillance process, intended for information exchange, policy discussions, and peer reviews which are the basis for enhancing regional monetary and financial cooperation. It facilitates analysis of economic and financial conditions of the global, regional, and individual national economies; monitoring of regional capital flows and financial market developments; assessment and management of vulnerabilities and risks; and undertaking of joint actions on issues affecting the region. This process is expected to induce better macroeconomic policymaking and implementation of desired financial sector policy and institutional reforms through peer pressure.

Second, the Chiang Mai Initiative (CMI), also introduced in May 2000, is a liquidity support facility intended to reduce the risk of currency crises and manage speculative attacks or contagion against currencies. It comprises (i) bilateral swap agreements (BSAs) among PRC, Japan, Korea, and between any of these plus-3 countries and a core ASEAN member and (ii) the ASEAN Swap Arrangement (ASA). The total bilateral swap size reached US$83 billion with 16 BSAs and the total ASA stood at US$2 billion as of July 2007.

Continuous progress has been made to strengthen ERPD and CMI. Some of the major developments over the last few years include (i) integration and enhancement of ERPD into the CMI framework (May 2005); (ii) raising the ceiling for withdrawal without an IMF program in place from 10 percent to 20 percent of the total (May 2005); (iii) adoption of the collective decisionmaking procedure for CMI swap activation, as a step toward multilateralizing the CMI (May 2006); and (iv) agreement in principle on a "self-managed reserve pooling" arrangement governed by a single contractual agreement as an appropriate form of CMI multilateralization (May 2007).

Currently, ASEAN+3 finance and central bank deputies are studying some key elements of CMI multilateralization (selfmanaged reserve pooling)—including surveillance, reserve eligibility, commitment size, borrowing quota, and activation mechanisms.

Finally, ASEAN+3 policymakers are promoting local-currency bond markets through the Asian Bond Markets Initiative (ABMI). The region's central banks are also making efforts through the Asian Bond Funds—particularly ABF2. These are expected to help make the Asian financial system more balanced so as to promote efficient allocation of financial resources and risks, and facilitate the recycling of regional savings for regional investment—particularly for physical infrastructure, SME businesses, and housing. It is estimated that there is a potential need for infrastructure investment, amounting to US$300–US$400 billion per year in Asia over the next ten years. At the same time there is a need to promote an efficient asset management industry given the rapid pace of aging in several economies.

EAS financial cooperation. The East Asia Summit (EAS) was launched by 13 ASEAN+3 members, Australia, India, and New Zealand in 2005. This group is expected to focus on financial cooperation as one of the five priority areas for cooperation (the other four being energy, education, combating avian influenza, and natural disaster mitigation) but its exact nature has yet to be identified. EAS financial cooperation needs to complement and support the existing cooperation arrangements under ASEAN and ASEAN+3. Some of the suggested functions of EAS financial cooperation may include (i) playing the role of an Asian voice caucus in larger international forums like IMF, G20, etc.; (ii) establishing an East Asian forum for capital market regulators which may evolve into the Asian version of the Financial Stability Forum involving the region's finance ministry and central bank officials; and (iii) providing capacity building support for weaker countries.⁴

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