Towards Monetary and Financial Integration in East Asia
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Towards Monetary and Financial Integration in East Asia

Edited by Koichi Hamada, Beate Reszat and Ulrich Volz

This indispensable book provides a comprehensive analysis of monetary and financial integration in East Asia. It assesses the steps already taken toward financial integration and brings forward different proposals for future exchange rate arrangements in what has now become the world’s most dynamic region.
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Chapter 4: Learning by Doing in Market Reform: Lessons from a Regional Bond Fund

Guonan Ma and Eli Remolona


Guonan Ma and Eli Remolona1 INTRODUCTION 4.1 Since the Asian crisis of 1997, local currency bond markets in the region have expanded rapidly; even so, they are still seen as not achieving their potential to intermediate between domestic savers and borrowers. Capital flows since the crisis show that Asians have been investing largely in lowyielding foreign assets and foreigners in higher-yielding Asian assets. While some of these flows are consistent with portfolio diversification, the broad pattern suggests that a sizeable part of financial intermediation is being carried out abroad at significant cost. To bring such intermediation home, Asian policymakers perceive a need for deeper and more liquid local bond markets. This perception has spawned a number of regional cooperative efforts at market reform. In this chapter, we assess one such undertaking—an unusual one in that it involved the creation of an actual bond fund, with financial contributions from the parties concerned. The regional group involved is the Executives’ Meeting of East Asia and Pacific (EMEAP) central banks.2 The fund they have created is called the Asian Bond Fund 2 (ABF2) which was first launched in mid-2005. We argue that because the group set up an actual fund, its reform efforts enjoyed significant advantages from “learning by doing”. In what follows, we first provide an overview of the recent development of local currency bond markets in East Asia and describe the main impediments in those markets. We then explain the structure and features of ABF2 in the context of various...

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