Academic journal article China: An International Journal

China and Monetary Integration in East Asia

Academic journal article China: An International Journal

China and Monetary Integration in East Asia

Article excerpt

Flaws in East Asia's original exchange rate regime were exposed in the aftermath of the Asian Financial Crisis of 1997-98. Without a regional monetary coordination mechanism, the uncoordinated exchange rate policies of the region meant their economies were vulnerable to fluctuations in exchange rates with the world's major currencies. The Asian Financial Crisis gave much impetus to the quickening pace of East Asian cooperation. The Chiang Mai Initiative (CMI) was agreed upon in May 2000 to provide liquidity support and manage currency crises, and the Asian Bond Initiative (ABI) was endorsed in August 2003 to develop the regional and domestic financial market and improve regional financial cooperation.

The Chinese economy is set to become the most important in the region and the government is now taking serious steps to integrate it into the world economy. In this article, we focus on the potential role of the Chinese economy in the process of regional integration. In particular, we attempt to make some proposals for East Asian monetary coordination and pay more attention to the potential role of the Chinese renminbi (RMB) in a regional basket arrangement.

The Progress of East Asian Cooperation

On 15 December 1997, the first "10 + 3" (ten ASEAN countries plus China, Japan and Republic of Korea) leaders' meeting was held in Kuala Lumpur. (1) The main topic was how to overcome the Asian Financial Crisis. In the following few years following this meeting, remarkable progress has been achieved. The most significant achievements are these:

* A joint statement was issued on the direction and areas of the regional cooperation in 1999, and for the first time the East Asia Vision Group presented their long-term vision for the East Asian region: a free trade and investment area for East Asia, with gradual institution building towards a regional community.

* Institutional infrastructure for cooperation has been developed: leaders' annual meeting, ministers' meetings, senior officials' meeting and functional programmes.

* Financial and monetary cooperation represented by the CMI and regional financial surveillance has become a reality, and the "Greater Mekong River Development Project" was put into the framework of East Asian cooperation.

* China and ASEAN announced plans in 2001 to develop a free trade zone within ten years' time.

* Agreements were made at the ASEAN+3 Finance Ministers' Meeting in Istanbul in May 2005 to further develop the Chiang Mai Swap Mechanism. As of early May 2006, the mechanism had increased by 90 per cent in size from USD39.5 billion to USD75 billion. Moreover, the percentage of automatic drawing rose from 10 to 20 per cent. The latest ASEAN+3 Finance Ministers' Meeting clearly stated that the CMI should be multi-lateralised and finance ministers agreed to build up a self-managed reserve pooling arrangement.

China's Role in East Asian Monetary Integration

In recent years, China has become more interested in regional economic cooperation. This reflects the closer economic ties between China and the rest of East Asia. There are also many potential benefits that China and the other East Asian countries can get from China's participation in regional monetary integration.

Trade Patterns

Fixed exchange rates and monetary cooperation create benefits such as a reduction in the transaction costs associated with bilateral trade and investment. Countries with close trade links should therefore benefit from fixed exchange rates and monetary integration. It is therefore remarkable that several studies argue that East Asia is at least as well integrated as Europe in terms of intraregional trade. (2)

Recent trade data show that intra-regional trade among East Asian countries as a share of GDP is already similar to that of the Economic and Monetary Union of the European Union, and higher than that of other regions such as the North American Free Trade Agreement or Mercado Comun del Sur, or common market of the South (Mercosur). …

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