Saturday, May 21, 2011

18/05 POINT OF VIEW/ Satoshi Shimizu: Growing significance of regional financial cooperation in Asia


As Asia's importance to the global economy grows, the importance of the development of regional financial cooperation is increasing.

In particular, the development of bond markets in Asia is expected to lead to an expansion in methods of procuring funds for improving infrastructure.

Recently, there has been a re-examination of how best to advance efforts toward regional financial cooperation, which started to get fully under way in the wake of the 1997 Asian financial crisis.

With Asia's increasing weight in the global economy, it is becoming more important to strengthen financial systems and work for the support of economic growth and the stabilization of the region's financial conditions.

The main issues facing the Asian economy include:

(1) the continuation of fiscal and monetary policy exit strategies, while keeping rising inflation in mind;

(2) finding appropriate ways of coping with dramatically fluctuating short-term capital flows;

(3) the enhancement of domestic financial and capital markets and the strengthening of financial intermediary functions, linking regional savings to regional investment; and

(4) the promotion of growth in domestic demand, or investment and consumption, changing from the export-driven growth strategy and assuming a driving role in the global economy.

At the national level, these issues are being addressed through a range of responses, such as fiscal and monetary policy, exchange rate policy, capital transaction restrictions and the beefing up of financial and capital markets.

At the global level, there is increased effort by the International Monetary Fund, the Group of 20 and other frameworks to tackle world economic issues.

At the February meeting of G-20 finance ministers, the agenda included:

(1) establishing guidelines to be used in the correction of global imbalances;

(2) strengthening the functions of the international monetary system, such as monitoring international capital flows and the role of special drawing rights;

(3) taking action in response to the rise of international commodity prices; and

(4) strengthening financial regulation and supervision.

In terms of regional financial cooperation, the development of regional-level policies is being called for based on these movements.

The principal details of regional financial cooperation include:

(1) the development of a liquidity support system in preparation for emergency situations;

(2) policy dialogue and surveillance; and

(3) the improvement of domestic financial systems.

With regard to points (1) and (2), the Chiang Mai Initiative Multilateralization (CMIM) has been agreed to, and there are plans to set up a surveillance unit called ASEAN+3 Macroeconomic Research Office (AMRO) in Singapore to support this move.

While CMIM is seen as being complementary to the IMF and other international frameworks, there are calls to improve the flexibility of the system by increasing the portion that can be borrowed without linking to IMF programs from the current 20 percent of the maximum amount of loans while expanding the scale of the framework by adding bilateral agreements.

In February, it was proposed that a new financing system to prevent a crisis, similar to the IMF's flexible and precautionary credit lines, be made available to CMIM.

The objective with regard to policy dialogue and surveillance is the coordination of macro-economic policies, including exchange rate policy.

While it will not likely be achieved in the short term, ongoing dialogue will be essential.

The development of the Asian bond markets is one of the important issues of regional financial cooperation.

Its objectives are the improvement of each domestic market as well as the expansion of regional, cross-border transactions.

The latter is becoming increasingly more important given the trend for greater integration of real economies against the backdrop of expanding regional demand and growing investor interest in Asia.

It was under these circumstances that the ASEAN+3 Bond Market Forum (ABMF) was set up within the Asian Bond Markets Initiative (ABMI) and efforts to promote cross-border transactions through public- and private-sector collaboration were started.

To expand cross-border transactions, it is necessary to achieve the harmonization and mutual recognition of market infrastructure, such as trading platforms, clearing and settlement systems and hedging instruments, and related regulations and systems, such as laws and regulations, credit rating agencies, accounting and auditing standards and taxation systems.

ABMF is researching details of the situations in each country to investigate the possibility of introducing frameworks for harmonization and mutual recognition.

It is also studying, as candidates for new cross-border transaction promotion strategies, the development of new bond indices, the standardization of bond issue rules throughout the region, the introduction of a fund passport system, which would enable the sales of Asian mutual fund products throughout the region through mutual recognition among a number of countries, the formation of an Asian corporate bond fund, or the so-called Asian Bond Fund 3, and the establishment of a regional credit rating agency.

Harmonization and mutual recognition mean accepting another country's laws and regulations in one form or another, which, as well as requiring a considerable amount of time, are likely to be difficult to realize when there are big differences in the level of market development among countries involved.

In addition, the promotion of cross-border transactions will require further capital account liberalization in the region and internationalization of regional currencies.

To overcome these difficulties, the various proposals described above will need to be considered in a positive light.

The development of domestic bond markets in the region remains a big challenge.

While bond markets in Asian countries have grown significantly, there is a great degree of diversity in the level of development, particularly in the case of corporate bond markets, and bond issuers are generally concentrated among government-owned companies, financial institutions and energy- and infrastructure-related companies.

The bond market is an important element of any financial system, and if cross-border transactions are to be expanded, it is essential that national markets be improved and disparity in the development stage be minimized.

In particular, the development of secondary markets and instruments to hedge exchange rate risks are important points.

In the conventional, export-driven growth strategy, foreign capitalized firms have been the growth drivers.

They generally procure funds through stock markets and do not use bank financing or issue corporate bonds frequently.

On the other hand, given that the industries of finance and energy and infrastructure are all closely related to domestic demand, it will be necessary to prioritize the utilization of corporate bond markets in the development of financial systems for the expansion of domestic demand, and this, in turn, will lead to market expansion.

In this way, it may be expected that domestic demand growth and corporate bond market expansion will develop synergistically.

To this end, it will be necessary to help small- and medium-sized businesses, which will play a crucial role in expanding domestic demand, procure funds from bond markets through securitization and other measures.

It will also be important to consider ways to expand bond issues in industries related to domestic demand and services, such as securitization of housing loans and credit card receivables, and increase corporate bond investment by institutional investors.

As Japanese companies focus on Asia's domestic demand-related businesses, it is also expected that the need for procurement of local currencies will grow and that there will be an increase in the instances of local bond issues. It will be important to reinforce support for these.

From these perspectives, in terms of concrete methods of making use of corporate bond markets, the most attention is on their increased application to capital procurement for infrastructure development.

Asia has a lot of room for improvement in its infrastructure, and there is expected to be significant demand for infrastructure development funds in the future.

In February, the Japan Business Federation (Nippon Keidanren) mission to Indonesia, Thailand and Singapore reached an agreement with government leaders in those countries on the urgent need for the development of public private partnership (PPP) schemes, the further development of bond markets to aid capital procurement and the introduction of bilateral offset mechanisms, with the aim of advancing infrastructure development.

Since capital procurement for infrastructure development will be large and long term, it would be desirable to expand methods of putting bond markets to use, such as project bonds issued by the entities carrying out infrastructure development with the repayment source being limited to profits earned from the project, in addition to infrastructure funds.

Also, it is essential for the public sector to provide methods of lessening risk, and it has been proposed that the Asian Development Bank establish an Asia infrastructure fund.

The use of the Credit Guarantee and Investment Facility (CGIF) established in the region last year is another powerful choice.

* * *

Satoshi Shimizu is a senior economist at the economics department of the Japan Research Institute.

This report was published in the April 2011 edition of Asia Monthly, an English-language publication of the institute, and was edited by The Asahi Shimbun. The original report is available at (

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