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Regional Financial Co-operation: Initiation and Way Forward

This article provides an update on Asian economies, regional co-operations, and the way forward for financial co-operation in the region. It discusses economic growth indicators, financing structure, market capitalization, bond market development, equity market development, monetary and exchange rate policy, and the possibility of an Asian Monetary Union.

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Regional Financial Co-operation: Initiation and Way Forward

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  1. Regional Financial Co-operation:Initiation and Way Forward Stephen Yan Leung CHEUNG City University of Hong Kong

  2. Contents • Update on Asian economies • Regional Co-operations • Way forward

  3. The 1997-8 revealed the weaknesses • Corporate sector • Financial institutions • Exchange rate management

  4. Economic Growth Indicators (I) Region • Impressive growth rate since the crisis • Major set back in 2003 Q2 • Recovered strongly • Example: HK grew at 3.35 at 2003 and is expected to grow at 7.5%

  5. Table 2: Economic Growth of some selected Asia Economies during 1996-2003

  6. Economic Growth Indicators (II) • Asian region is expected to grow at a faster pace • Funds needed to sustain high-tech economic growth • What reforms needed to further enhance our regional capital makrets

  7. Table 3:Overview of the World Economic Outlook Projections (Annual percent change unless otherwise noted)

  8. Table 4: Market Capitalization of Listed Companies (as a % of GDP) in Selected Asia Economies, 1997-2003

  9. Box 1(I) • At the end of 2003, 1,307 companies were listed in Hong Kong. • Total funds raised rose 91.6% from the preceding year • The market capitalization rose 54% • The daily turnover was HK$10.4 billion

  10. Box 1(II) • Mainland companies accounted for 43.4% of market turnover • 27.4% of the new listings • 25% of total equity funds raised • More important role • Bank financing plays an important role in ten region • Bond market is underdeveloped

  11. Asian Crisis • Currency mismatching • Maturity mismatching A high –quality bond market with sufficient market depth could have long-term economic development and reduce the probability of future crisis

  12. Table 5: Financing Structure of Asian Economies and Selected Countries in 1995 and 2003

  13. Box 2 The Hong Kong government has just completed its first securitized bond issue. The HK$6 billion worth of bonds issued are backed by the net revenue from five tunnels and a bridge owned by the government. The issues were over-subscribed; almost half are now owned by the general public with an oversubscription rate of 2.13 times and the rest by the institutional investors with an oversubscription rate of 3.1 times. In order to enhance the bond’s liquidity and promote retail participation, the issues were listed on the Hong Kong Exchange on 10 May 2004 with the board lot size of HK$50,000, which is around US$6,410.

  14. II. Financial Market Reforms • Monetary and exchange rate policy • Bond market • Equity market • Risk management of banks

  15. Monetary and Exchange Rate Policy • Asian Monetary Fund • Chiang Mai Initiatives - currency swap lines arrangement between ASEAN+3 • arrangement between ASEAN+3 • swap network, regional surveillance, monitoring of capital flows, and training of personnel Observation: the amount of money is small relative to the reserves and the liquidity of the markets

  16. ASEAN’S surveillance system to Encourage the Coordination of Macroeconomic and Financial Policies • Early warning system??? • The nature of crisis is changing • Hard to use historical pattern to predict future crisis Observation: whether governments in the region can ‘really’ share sensitive economic information.

  17. Bond Market Development (I) • EMAP – ABF1 and ABF2 • ASEA+3 – New securitized debt instruments, issuance of debt by international financial institutions, regional credit guarantees and enhancement facilities, local and regional credit-rating agencies • APEC – Development of Securitization and Credit Guarantee Markets

  18. Bond Market Development (II) Observation: Efforts in overlapping areas. Interdepartmental coordination needed between Central Bank, Ministry of Finance and Securities Commission for local market.

  19. Equity Market Development • Institute of Directors of East Asia network was formed • The guideline of good corporate governance practices was endorsed by APEC ministers 2001 • Future projects • scorecard on corporate governance • training initiative

  20. AMU (I) • Monetary and exchange rate stability- Asian Monetary Union Pros: • Boost up trade volume • Insulated from speculative attacks • Collective discipline on monetary stability, open capital markets, and fiscal prudence • Eliminate competitive depreciation • Enlarged, unified financial markets

  21. AMU (II) Cons: • Loss of monetary autonomy for national interests • Loss of autonomy to operate capital control

  22. AMU (III) • AMU may not too far and may not be the only solution • strengthening the CMI arrangement • developing further the bond markets in the region • extending free trade agreements • cooperating in the pursuit of exchange rate stability

  23. Capital Market Development • Legal and regulatory framework • Information transparency • Market infrastructure • Corporate governance • Credit agencies • Investor education • Cooperation and alliance of stock exchange

  24. ~ END ~

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