Research On The Monetary Cooperation Of East Asia

With the development of the economic and financial globalization, the monetary cooperation has become one of the core topics of the world economy andinternational finance. Unexceptionally, East Asia has also participated in thisglobalization process as a natural result of its economic development. Since theAsian Financial Crisis in1997, all of the East Asian economies have committedthemselves to seek the ways of enhancing the monetary and financial cooperation in order to be on their guard against future financial crisis and to maintain the steady economic growth. After the2008Global Financial Crisis, there are arguments focusing on the reform of international monetary system. As a part of the arrangements for constructing regional monetary system, the East Asian monetary cooperation is very significant for the reform of current US dollar dominating international monetary system, and also for the uplifting of the international status of the regional currency, e.g. Yen and RMB, especially for promoting the internationalization of RMB.On the basis of review of the Crises and analysis of the current economic conditions and cooperation in East Asia, the thesis analyzes the causes, motivations, foundations and pathway of practicing and reinforcing the monetary cooperation in this region. This thesis indicates that Chiang Mai Initiative (CMI), Asian Bond Fund,(ABF) and the bilateral and multilateral swap arrangements for managing a currency crisis in the member countries and so on are the representative achievements of the East Asian financial and monetary cooperation and argues that it is impossible to practice the regional single-currency blueprint in East Asia in the near future. It points out that the main direction of current monetary cooperation is the building of regional monetary anchor and exchange rate coordination mechanism, and during this process, the plan can be carried out by converting the sub-currency area gradually to whole-currency area, due to the great difference of economic development level, the degree of trade openness, and the economic cycle among East Asian economies. The process of the coordination of the exchange mechanism and the construction of single currency region can be divided into two stages on the premise that there are three sub-currency areas suitable for deep cooperation in the East Asian monetary cooperation:in the short term, coordinating the regional exchange system and discussing about economic policies in a low degree based on the early stage exchange cooperation; while in the long term, building up the stabilizing mechanism for exchange rate, deeply promoting the monetary cooperation in the whole area and achieving the roundabout coordination of exchange rate system and economic policies.The main contents of the thesis are as follows: Chapter one is an introduction, presenting the research topic, research framework and research methods, sorting out the literature review about key issue sof East Asian monetary cooperation, such as the causes, foundations and pathway for monetary cooperation. Meanwhile, this part defines the content of East Asian monetary cooperation. The monetary cooperation can be divided into two senses, in narrow sense, it mainly covers the exchange rate cooperation mechanism; while in a broader sense, it also includes the monetary policy making in micro-finance regime and the conduction of monetary policies in financial market. However, the thesis will be focused on the research of the monetary cooperation on the cooperation of the exchange rate mechanism level.Chapter two presents the theories and practices of international monetary cooperation. In the theoretical part, the thesis reviews two theoretical bases:one is about the financial crisis and East Asian monetary cooperation, which mainly covers the theories of financial crisis and the relationship of financial crisis and East Asian monetary cooperation, and the latter is the focus of the research, and it will mainly discuss about the mutually promoting relationship between financial crisis and East Asian monetary cooperation; the other is about Theory of Optimum Currency Areas (OCA) and East Asian monetary cooperation, which works as the basic theory for discussing about regional monetary cooperation throughout the whole researching process. As to the practice of international monetary cooperation, the thesis mainly discuss about the Bretton Woods System and the process of European monetary integration in the history of international monetary cooperation. The experience of the former provides us with the regular thoughts of researching monetary cooperation, while the latter provides us with experience as it is the most successful practice for monetary cooperation. Also in this part, the thesis includes the analysis of the cause and cost-benefit for dollarization in Latin American countries, for currently, the East Asia is unable to wipe out the reliability on dollars in international trade and investment, the research on the dollarization of Latin American countries helps clarify the different functions of dollar in the process of East Asian monetary cooperation and Latin American countries; and nevertheless, it helps correctly consider the status and functions of USD in regional currency basket by looking into the cost and benefit of dollarization and the anti-dollarization tendency in Latin American countries.Chapter three discusses the status quo and causes of the monetary cooperation in East Asia. The monetary cooperation in East Asia is mainly on the phase of crisis relief and supervision, rarely on the second phase-exchange rate regime cooperation or the third phase-construction of the monetary union. After the Asian financial crisis in1997, regional supervision and relief mechanisms were founded such as the Chiang Mai Initiative (CMI) and ASEAN Supervision Program (ASP), on the basis of which derived systemic relief vehicles such as Asia Bond Funds (ABF) and the Common Foreign Exchange Reserve Pool. As for the exchange rate cooperation, progresses have been made only in information cooperation and supervision and coordination of foreign exchange reserves, and no effective cooperation on exchange rate has been made so far. The main practical causes include the quick spread and deepening of the Asian financial crisis in1997due to lack of help from IMF, monetary cooperation in East Asia promoted by regional economic (trade,investment, etc.) integration, and success of Euro and its role model effect in maintaining low inflation and controlling government expenditures as well as the external propulsion of reform in international monetary system. On the theoretical motivation side, this thesis clarifies the financial stability effect of monetary cooperation, the economic growth effect and benefit-cost analysis, and thus believes the benefits brought by monetary cooperation exceed costs in loss of seigniorage and independence in monetary policies.Chapter four analyzes OCA conditions in East Asian monetary cooperation and the strategic considerations and underlying different attitudes of the US, Japan, China and ASEAN toward the cooperation. As to the factor flow in East Asia, this thesis believes that labor mobility in the region has been raised a lot, but driven mainly by industry development instead of spontaneous market force and the proportion of labor flow has not reached the level yet when Euro was introduced;capital mobility is low and openness of member countries’ capital accounts is different. On the part of financial market integration, judging from indicators such as proportion of the stock market, formation of fixed assets and market value of bonds, capital markets in East Asia are converging to symmetry, but great differences in market capitalization and development speed lie within each economy in the region. In terms of trade integration, East Asian countries have a high trade dependency as a whole, exceeding that of the Euro Zone countries at the introduction of Euro. However, there are considerable differences among the East Asian countries in external trade dependency, entailing better coordination to promote exchange rate stability so as to meet the demand of integration. On the structure and similarity of macro economies, East Asian countries show higher and higher synchronization in economic growth and business cycle, but difference remains in economic and industrial structure among countries in the region. Besides, the macroeconomic indicators of each country are not converging. In the perspective of game theory,Japan tries to establish a Yen-based Asian common single currency through pushing forward the monetary cooperation, while in order to maintain its military strategic deployment and geopolitics the US has been opposing any form of "exclusive" cooperation within the East Asia and wished to promote "Asia-Pacific wide" cooperation. China has been promoting the internationalization of RMB so as to meet the demand for a stable exchange rate by trade and investment. Nevertheless,for this moment, China’s mainly task remains developing economy and strengthening economic and trade relations between countries in the region, and therefore it doesn’t show much enthusiasm in monetary cooperation. Due to historical grudges against Japan and territory disputes with China in the South Sea, ASEAN countries do not wish Japan and China lead regional monetary cooperation and thereby adopt the "ambiguous position" strategy, introducing the main strategic interest parties such as the US, Japan and China to check and balance each party and therefore lead the cooperation itself. Consequently, different interest demands become one of the obstacles that hinder East Asian monetary cooperation in the short run.Chapter five proposes the route and choice of plans for East Asian monetary cooperation practically. The target for the East Asian monetary cooperation is in the short term to perfect East Asia information sharing and relief mechanism, in the medium term to found East Asia exchange rate stability regime and in the long run to establish the Common Monetary Area. Progresses have been made in information sharing and crisis relief, and further improvement and strengthening are expected recently in East Asia. This thesis concentrates on the construction of exchange rate coordination mechanism in the monetary cooperation. The choice of exchange rate regime depends on factors such as economy scale, trade dependency and structure of product and export. Currently, the exchange rate regimes in East Asia are different. As a result, to coordinate exchange rate regimes, a proper "anchor" should be picked. As East Asia does not have the economic and political basis that Latin America had when Latin America adopted dollarization, the idea is not realistic that the USD stands as the only monetary anchor in the East Asian monetary cooperation. On the other hand, because the JPY has been weakening and the RMB has not become internationalized or even regionalized, neither could play the role of monetary anchor. Based on the above, this thesis suggest that SDR and a currency basket be the nominal anchor in East Asia, and by gradually reducing the proportion of USD and EUR, a nominal anchor with SDR and a basket that currencies in East Asia (such as RMB, KRW, JPY and THB) dominate. Exchange rate coordination could be phased into five steps:firstly to establish policy talk mechanism on exchange rate regime and fluctuation, secondly to achieve formal coordination in exchange rate regime by allowing further flexibility of currencies against USD, thirdly to implement formal but loose policy coordination, and the fourth and fifth steps come together to release formal and firm exchange rate policy coordination.Chapter six is mainly on the East Asian monetary cooperation and China’s role in the perspective of international monetary system. In the perspective of China and Japan, China should focus on strengthening economic and trade ties with ASEAN countries within the China-ASEAN Free Trade Area framework at the moment. In this way, the economic interest could overcome the political pressure and tie countries closer over time. At that time, as economies grow and strategic targets shift, promoting East Asian monetary cooperation will come to a natural end.