Coping with a New Monetary Order after the Global Crisis
Chapter 8: Financial market integration and Asian bond market initiatives
Despite various attempts and ideas, there has been little significant progress made in East Asian monetary integration apart from the Chiang Mai Initiative. Eichengreen (2002) argues that ‘monetary and exchange rate cooperation is the wrong project for Asia’, highlighting that Asia lacks the political commitment to deepen integration and to establish supranational institutions with agenda- setting power. This led him to argue in favour of ‘cooperation to deepen and strengthen regional financial markets’, or more concretely, the establishment of an ‘Asian Financial Institute’ on the platform of ASEAN13. Because of East Asian countries’ fear of losing their national monetary sovereignty, there is greater potential for financial cooperation than for monetary cooperation in East Asia. Whenever talks about monetary and exchange rate cooperation issues reached a stalemate, financial cooperation issues emerged as an alternative for circumventing the deadlock and continuing regional cooperation. Against this background, initiatives to develop regional bond markets have attracted special interest from many countries in the region. First, the development of regional bond markets was considered helpful in solving the double mismatch problem of short- term bank borrowings by East Asian companies from foreign banks, allied to long-term East Asian investment in foreign assets, and of East Asian loans in foreign currencies from foreign banks being vulnerable to exchange rate fluctuations. Second, the post- crisis accumulation of foreign reserves in US dollars, unprecedented in its magnitude, prompted a discussion on bond market development. The development of regional bond markets has since been at the centre of discussions in many ASEAN+3 and APEC meetings.
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