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Assessment of Financial Cooperation

Assessment of Financial Cooperation. May 2006. Park, Bun-Soon. Samsung Economic Research Institute. Contents. Existing Cooperation Mechanism 2. Recent Developments 3. Tasks Ahead. Existing Cooperation Mechanism. 1. Existing proposals for financial and monetary cooperation

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Assessment of Financial Cooperation

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  1. Assessment of Financial Cooperation May 2006 Park, Bun-Soon Samsung Economic Research Institute

  2. Contents • Existing Cooperation Mechanism 2. Recent Developments 3. Tasks Ahead

  3. Existing Cooperation Mechanism 1. Existing proposals for financial and monetary cooperation - Since the Asian financial crisis in 1997, there have been various ideas and proposals for a stable regional and global foreign exchange market in East Asia • These proposals can be divided into three categories • monitoring and surveillance • providing liquidity • exchange rate coordination

  4. Existing Cooperation Mechanism • Manila Framework Group for monitoring and surveillance • Launched in November 1997 shortly after Asian financial crisis - Member countries include East Asian countries and other countries such as the US, Canada, and Australia • Focus on enhancing regional dialogue and surveillance • Chiang Mai Initiative (CMI) for liquidity assistance • Established in May 2000 - Comprised of ASEAN+3 • It is a network for bilateral swaps and repurchasing agreements • Asian Bond Market Initiative for development of capital market • Focused on financial sector restructuring and development - To Provide an alternative sources of funding - To reduce the reliance on offshore financing as well as its associated exchange risk

  5. Recent Developments 1. Achievements of CMI • Expanded the amount of emergency financing • The amount of emergency funds rose from US$39.5 billion to US$75 billion • Account for approximately 40% of total foreign exchange reserves that nine member nations (excluding Korea, Japan, China, Singapore) hold • Established collective decision making system • If emergent situation occurs, countries providing capital call a meeting within two days • All the decision-making process over financing is completed within, at least, two weeks, immediately followed by the provision of required amount of capital • To launch discussion over establishment of “Group of Experts” and “Technical Working Group on Economic Financial Monitoring”

  6. Recent Developments 2. Growth of Asian bond market • Expansion of the bond market • The East Asian bond market (excluding Japan) has grown from US$405 billion in 1997 to US$1.735 trillion in 2005 • Savings spurring investment within Asia • Accounts for approximately 40% of total foreign exchange reserves held by nine member nations (excluding Korea, Japan, China, Singapore) • Increasing issuance of local currency-denominated bonds • Yen-denominated Primary CBO was issued in 2004, followed by denominated in Baht (Thailand), Ringgit (Malaysia), Peso (the Philippines) and Yuan-denominated bonds, or Panda Bond

  7. Recent Developments 3. Discussion over establishing common currency • Initiated discussions over Asian Currency Unit (ACU) in the finance minister meeting for Korea, Japan and China • Study being conducted over the usefulness of Regional Currency Unit

  8. Tasks Ahead 1. CMI changes to AMF • Studies on Post-CMI • More studies are being done over the problems and expectations regarding the new system based on recent achievements the existing system has made • Establish permanent organization for surveillance - An organization should be established to support Post-CMI • Change into AMF system – the ultimate goal • This should be handled by consulting with the US and the International Financial Institutions (IFIs) • AMF system is expected to contribute to the stabilization and further growth of the East Asian economy

  9. Tasks Ahead 2. More consideration is needed for ACU introduction • Set up friendlier environment for the introduction of common currency in the longer perspective - Joint effort needed to narrow the gap between the economies of Northeast and Southeast Asia • At the same time, Northeast Asian countries should focus on mediating conflicts rising from each nation • Consider introducing common currency in Korea, Japan and China first - First of all, free trade area should be established in East Asia in order to prompt intra-trade - The use of common currency to be expanded within the area as a way of payment for intra-trade

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