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Prospects of
Globalisation
a
Single
Asian
Currency
in
the
Age
of
Economic
Chairman, Distinguished Guests, Ladies and Gentlemen,
I am honoured to be invited by Chairman Long Yongtu to join the annual
Boao Forum, which has rapidly established itself as the primary centre
for the discussion of key challenges facing Asia.
1. [Recently I heard an Asian friend giving a brilliant speech. He
said that in the West, speeches start with a joke and ends with a joke.
In Asia, he said, we start with an apology and end with an apology. And
in between, it's all a joke!]
2. I think Asians are more serious than that and since I don't know
any jokes, I shall plunge straight into the very serious subject before
us: Should there be a Single Asian Currency?
3. Before we answer this question, we need to ask: why do we need
a Single Currency? The simple answer is that if there is a sense of Asian
unity, then a Single Asian Currency can either facilitate that Asian unity
or become a common means towards that end.
4.
But unfortunately, life is not that simple.
5. First, Asia spans from the geo-politically sensitive area and
oil-rich areas of West Asia to, depending whether you agree or not, as
far East as Australasia. Asia as the third zone in the world is much more
diverse than either the Americas or Europe. Asia accounts for 60% of
global population, but less than one quarter of GDP. Asia ranges from
the economic advanced country of Japan to some of the poorest economies
in the world. Japan alone accounts for 52% of Asian GDP and 60% of Asian
financial assets.
6. Second, Asia is unlike Europe that needed a Single Currency as
part of a political union, and Europe has worked towards political and
economic integration for over 50 years before the birth of a single
European currency in 2001. Even with common objectives, it took half a
century to achieve a single currency.
7. Third, the rise of the Euro has created a serious alternative
to the US dollar, and it is not currently clear whether there is room for
a third global currency.
We must not forget that the Europeans
experimented with different currency arrangements, such as the snake or
crawling peg, which were subject to many speculative attacks before the
Euro was successfully launched. Can Asian unity and common understanding
withstand such speculative attacks against Asian currencies during this
transition?
8.
Fourth, a single common currency requires deep and robust
financial systems and markets, including strong institutional support.
Asia has just recovered from a crisis of global proportions, in which many
domestic weaknesses in our financial systems have been exposed. Is our
institutional and market base ready for the launch of such an important
and strategic initiative?
9.
All these are serious questions, requiring serious answers
before the way forward is clear. But the benefits of globalization and
Asian economic integration are clearly strong incentives for us to think
about whether we should work towards a single Asian currency.
10.
Asia has clearly benefited from globalization. Asia's share
of world merchandise exports has more than doubled from 10% in 1985 to
26% in 2003. Intra-regional trade within Asia is growing at an average
of 14% per annum over this period, double the average growth of global
exports, and accounting for half of East Asian exports, compared with only
30% in the mid-1980s. Trade is dominated by manufactures, and even though
the product chain has been restructured by the division of labour
throughout Asia, the ultimate consumption engine remains largely outside
Asia.
11.
The real issue within Asia is whether Asia can generate its own
internal engine of domestic growth, rather than relying primarily on
exports. The corollary question is then whether a single currency or
common currency arrangements would help the promotion of intra-Asian
trade and investments.
12.
Asian industrial restructuring and integration is being driven
by FDI flows, particularly intra-regional FDI flows. Total FDI flows
into Asia has risen to US$103.2 billion in 2003, compared with only US$20
billion in the early 1990s. According to UNCTAD figures, Hong Kong is
the largest outward direct investor among developing economies and 7th
largest contributor to global outward FDI stock. Hong Kong's outward FDI
to the rest of the world, especially Asia, amounted to US$336 billion at
the end of 2003.
13. But let me be blunt. Most of the trade within the Asian region
and with the rest of the world is still in manufactures. The share of
services, particularly financial services, is still very small. Why is
this?
14. The answer is that Asia is strong in manufactures and natural
resources, but relatively weak in financial services. We are dominated
by large domestic banking systems, our capital markets remain fragmented
and we have not yet begun to build strong retirement and social security
funds to provide for our aging populations.
15. Asia as a whole runs a modest current account surplus with the
rest of the world, equivalent to 1% of GDP in 2003. Most of the current
account surplus is placed with the financial markets in US and Europe,
with foreign exchange reserves amounting to roughly US$2 trillion. Most
of those funds come back to Asia in the form of FDI and FPI(foreign
portfolio investment).
16. There is therefore a total equity return swap relationship between
Asia and the capital markets outside Asia. We place a large part of our
savings outside the region, earning up to 4% annually in long-term bonds
in dollar and Euro, and the money comes back to Asia in the form of
leveraged FDI and FPI which earn up to 10-15% total return on equity.
17. This is a symbiotic relationship, and a risk-sharing relationship
that is good for all parties. But if we are ever to think about a common
currency, we must think about how we must first strengthen our own domestic
financial systems.
18. As you well know, the Asian ministries of finance and central banks
have been working hard on a deep and liquid Asian bond market since the
launch of Asian Bond Fund 1 in June 2003 and more recently, Asian Bond
Fund 2(ABF2) in April 2004.
As former Financial Secretary, I
participated actively in these early stages of those discussions. The
Hong Kong Monetary Authority has been working hard with regional central
banks to launch both products, especially ABF2, which will be sold at the
retail level. The objective of ABF2 is to act as a catalyst to promote
new products, improve Asian market infrastructure and reduce regulatory
hurdles in Asian markets that prevent intra-Asian trade in financial
products.
19. In this regard, for a host of historical reasons, because of
diverse legal and institutional backgrounds, Asia has unwittingly erected
regulatory barriers against trade with each other in a variety of
financial products. We have the irony of growing free trade in physical
goods, but relatively little free trade in financial products within Asia.
20. For example, it is easier for a mutual fund registered in
Luxembourg or a bond listed on the Irish Stock Exchange to be traded within
Asia than for a Hong Kong mutual fund to be permitted to be traded in any
of the Asian markets and vice versa. Each Asian financial product has
to be individually approved and registered before it could be traded.
This explains why there is little cross trading of Asian financial
products.
21. This does not make sense, since there is no reason why Asian
regulatory standards cannot be harmonized according to international
standards.
22. Towards this end, the Hong Kong Securities and Futures
Commission(SFC) has begun to sign letters of intent(LOIs) with regional
jurisdictions to facilitate greater regulatory harmonization in line with
international(IOSCO) standards. So far, we have signed LOIs with
Indonesia, Thailand and Sri Lanka. These bilateral LOIs will facilitate
more and more Asian financial products(beginning with mutual funds) to
be traded within Asia, paving the way for ABF2 to reach the retail market
across Asia.
23. Our work with regional central banks and securities commissions
represent concrete and pragmatic steps in building regulatory cooperation
with each other. Once Hong Kong and other jurisdictions learn from each
other in terms of regulatory cooperation, many more Asian financial
products can be traded within Asia. This will generate critical mass for
Asian savings to be re-invested within Asia. Without greater free trade
in Asian financial services, monetary integration cannot happen
successfully, if at all.
24. In short, we must learn to walk before we can run. As someone
who is totally realistic and pragmatic in the way forward in Asian monetary
and financial cooperation, we must first create the conditions for greater
free trade in financial services, before we even begin to talk about
monetary integration and cooperation.
25. The Boao Forum is one such forum where we can truly and frankly
help build that understanding and friendship whereby a free and prosperous
Asian market can be built. As one of the premier financial centres in
the Asian time zone, Hong Kong pledges to work closely with all its trading
and regional partners to build the conditions for greater financial and
monetary cooperation in the future.
26. I do not have rosy dreams to offer, but only concrete and tentative
steps forward. But in Asia, we understand very well that the journey of
a thousand miles begins with the first step.
Thank you.