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East Asian Regional Financial Cooperation: Visions and Challenges Economic cooperation, Financial integration

Author Deok Ryong Yoon, Sungbae An, Hee-Yul Chai, Yeongseop Rhee, and Woosik Moon Series 20-33 Language Korean Date 2020.12.30

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   After the East Asian financial crisis in 1998, the need to strengthen financial cooperation, including liquidity support at the regional level, emerged. Accordingly, the Chiang Mai Initiative (CMI) was signed at the ASEAN+3 Finance Ministers’ Meeting in 2000, and institutional efforts to strengthen regional financial cooperation have been continued for 20 years. The outcomes of this effort include the Chiang Mai Initiative Multilateralization (CMIM) and the Asian Bond Market Initiative (ABMI). However, it is difficult to find countries actively utilizing them. For example, even though the blockade caused by the spread of COVID-19 in 2020 led to a decline in economic activity and suffered instability in the foreign exchange market, none of the ASEAN+3 countries attempted to resolve market instability by using regional financial cooperation mechanisms. Under this circumstance, we try to find the reason for the poor use of CMIM. First of all, CMIM is linked to the International Monetary Fund, so it cannot be free from the sigma effect. The size of support is also small, as well as using the holding amount. Chapter 2 pointed out the lack of leadership and vision as the cause of the failure to improve even though there was the awareness of such institutional weakness in the region. Therefore, a plan to increase the effectiveness of CMIM was suggested as follows. First, we suggest establishing a “CMIM Fund” and the future vision of regional financial cooperation by introducing regional currency cooperation and regional settlement systems in connection with financial cooperation. Second, It will also helpful to bring Australia and New Zealand as new member states. This is to take advantage of the developed financial industries of those countries while coming out of the sluggish financial cooperation caused by political conflicts between the existing member states. ABMI, which has been performing the most within the ASEAN+3 framework, has taken the strategy of presenting a new roadmap every certain period of time, thereby facilitating the introduction of financial infrastructure and institutions in the ASEAN region as well as the development of the local currency denominated bond market. However, due to the gap in the level of economic development among member countries, there are limits such as the continuing difference in the degree of development of the bond market between ASEAN+3 countries and the still large regional infrastructure investment gap. Chapter 3 proposes a multilateral and bilateral approach to improving the financial settlement infrastructure and expansion of regions including Australia and New Zealand to address these problems. In Chapter 2, the participation of Australia and New Zealand to improve the governance structure of CMIM was considered. In terms of the local currency bond market, it is interesting to discuss with Australia. As of the second quarter of 2020, the size of the bond market in Australia is $2.19 trillion, similar to the size of the Korean bond market. The peculiar thing is that the share of financial institution bonds is 53.9%, which is considerably higher than that of the US, UK, and Japan. In addition, as the share of raw materials in Australia’s export composition is close to 60%, the Australian dollar shows a high positive correlation with raw material prices. In other words, unlike most advanced countries’ currencies, it has the property as a risky asset that reacts sensitively to fluctuations in commodity prices. This can be interpreted as, for example, that there are many cases of moving in the opposite direction to Japanese yen assets, and it can be seen that it helps to organize an optimal portfolio. Therefore, attempts to expand ABMI’s regional reach, including Australia and New Zealand, which are pursuing policy strengthening of cooperation with ASEAN will be meaningful. Chapter 4 looks at monetary cooperation between East Asian countries and explores the possibility of new cooperation through the use of Central Bank Digital Currency (CBDC) in this region in the future. The fundamental reason why East Asian monetary cooperation has not been successful is that it has set a low-realistic goal of stabilizing exchange rates in the region. Therefore, we would like to consider setting a more specific goal of “cooperation in issuance and common use of CBDC” and think about ways to achieve more visible results. Still, the cross-border payment and settlement process involves problems due to high costs, risks, and uncertainty in transactions. If CBDC is introduced and can be used for international payment and settlement, this problem can be solved in terms of improving the efficiency of payment settlement and promoting the internationalization of the local currency. However, in order to realize this, cooperation between central banks of regional countries is essential for the holding and using the CBDC. Cooperation through the CBDC may lead to a change in the international monetary order centered on the US dollar, and in the process of cooperation, international capital movements may be promoted, leading to further fluctuation of exchange rates. However, rather than reducing options due to excessive concern about this, we suggest that the time has come when efforts to realize the potential of cooperation through CBDC are needed. The effect of promoting the international use of Korean won could also be achieved. More specifically, it is possible to consider raising the “cooperation through CBDC” as a new agenda at the ASEAN+3 Finance Ministers and Central Bank Governors Meeting or Regional Comprehensive Economic Partnership (RCEP). In Chapter 5, we present new options that can be considered in order to escape the inactivity of financial cooperation in East Asia and cultivste the cooperation. In other words, from the perspective of change the existing cooperation structure centered on ASEAN+3 into a new one, it is transforming into regional development cooperation and expanding and moving its center country to Northeast Asia. The Northeast Asian region has great growth potential and enormous demand for investment, as it is called “the last major economic resort of the Asian continent”. However, since funds are insufficient to satisfy this, the establishment of a development financial institution in Northeast Asia is proposed as an additional method like Northeast Asia Development Bank, Northeast Asia Infrastructure Fund, and Northeast Asia Development Corporation. As a result of comparing and analyzing these three alternatives from various angles, the Northeast Asia Development Corporation seems to be the most suitable. The reason is that it does not require membership qualifications in international financial institutions when supporting funds first, allowing efficient allocation of funds. In addition, development-related banks in each country can avoid the form of international organizations, and local governments instead of central governments can participate, making it easy to establish. In addition, there are many other advantages, such as encouraging private participation and, from the standpoint of Korea, fostering the asset industry and enabling efficient use of long-term capital. However, in consideration of the fact that it cannot be free from political issues, some cautions are needed regarding the implementation system of the Northeast Asia Development corporation. First, rather than the government’s direct initiative, development banks, such as development banks and export-import banks, should lead the establishment, while encouraging the participation of private financial institutions in the region by emphasizing its commerciality to attract public-private cooperation. Second, it is not necessary to exclude China’s participation itself, but it is desirable to avoid letting China play a key role. This is because China’s pursuit of a one-on-one route and already high in its own fundraising capacity cannot rule out the possibility that this participation will be part of an external strategy rather than a regional development and cooperation level. Third, the Northeast Asian Development Corporation should also actively promote cooperation with existing multilateral development banks, such as Asian Development Bank (ADB) and European Bank for Reconstruction an Development (EBRD). Fourth, in order to focus on the aspect of financing necessary for the development of the Northeast Asian region, it can have a practical effect to establish the Northeast Asian region as the scope of activities of the Northeast Asian Development Corporation rather than encompassing all countries subject to economic cooperation with the New Northern Policy. In Chapter 6, we also propose a transition to the subject of financial cooperation, which is the transition from ASEAN countries to Central Asia, a relatively underdeveloped partner with high demand for development finance. These regional alternatives are Mongolia and Central Asia, which have been alienated from the target of financial cooperation so far in order to prepare Korea’s response strategy to Japan, led by the Asian Development Bank, and China, led by the Asian Infrastructure Investment Bank (AIIB). Cooperation is needed to encompass five countries (hereinafter, Mongolia and five Central Asian countries collectively referred to as Central Asia). Specifically, the “Korea-Central Asian Financial Cooperation and Training Center (tentative)” will be established as soon as possible for Central Asia to maintain the momentum of financial cooperation, and to expand the scope of cooperation to macro-financial fields including KRW settlement cooperation. This should be promoted in a direction that supports cooperation in the real sector, such as discovering new growth engines of the Korean economy in the long term, and finally, we need to build Korea-Europe-Central Asia’s trilateral financial cooperation system through cooperation with Europe, especially EBRD. As discussed above, this study proposes a new policy alternative to overcome the limitations of East Asian financial cooperation. Of course, more precise preparation is needed to implement these alternatives, and it is also acknowledged that the topics covered in this study are only a part of regional financial and monetary cooperation. However, in overcoming the limitations so far, it is hoped that it can be a contribution that provides at least a hint of thought, and it is expected to be more concrete in future studies.

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