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A Regional Bond Market for East Asia? The Evolving Political Dynamics of Regional Financial Cooperation. Jennifer Amyx Department of Political Science University of Pennsylvania Presentation at The Australian National University 9 March 2004. Project motivations. - PowerPoint PPT Presentation
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A Regional Bond Market A Regional Bond Market for East Asia?for East Asia?
The Evolving Political DynamicThe Evolving Political Dynamics of Regional Financial Coopers of Regional Financial Cooper
ationationJennifer AmyxJennifer Amyx
Department of Political ScienceDepartment of Political ScienceUniversity of PennsylvaniaUniversity of Pennsylvania
Presentation atPresentation atThe Australian National UniversityThe Australian National University
9 March 20049 March 2004
Project motivationsProject motivations Under what conditions will regional financial coopUnder what conditions will regional financial coop
eration emerge in East Asia?eration emerge in East Asia?
Variation in degrees of progress made to date acVariation in degrees of progress made to date across financial cooperation issues tackled thus faross financial cooperation issues tackled thus far: what explains variation in pace of progress?r: what explains variation in pace of progress?
Are regional cooperation outcomes affected byAre regional cooperation outcomes affected by Japan-China competitive dynamics?Japan-China competitive dynamics? Influence of the U.S. in the region? (esp. US-Japan relInfluence of the U.S. in the region? (esp. US-Japan rel
ationship)ationship)
Economic Capacities of ASEAN+3 Countries
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1990199119921993199419951996199719981999200020012002
Years
Percentage
China
Indonesia
Japan
Korea
All others
Differential progress across 3 arDifferential progress across 3 areas of financial cooperationeas of financial cooperation
AreaArea Outcome to dateOutcome to date
Short-term liquidity suppShort-term liquidity support in time of crisis (Chiaort in time of crisis (Chiang Mai Initiative)ng Mai Initiative)
Mixed successMixed successNetwork of bilateral currency swapNetwork of bilateral currency swaps in place (after 3 yrs of negotiatios in place (after 3 yrs of negotiation) but amounts involved small and n) but amounts involved small and release of 90% of funds tied to IMF release of 90% of funds tied to IMF program being in placeprogram being in place
Common currency arrangCommon currency arrangementement
Little progressLittle progressNo initiative emerges beyond comNo initiative emerges beyond commitment to “study” the issuesmitment to “study” the issues
Asian bond marketAsian bond market Rapid developmentsRapid developmentsBut, a long way to goBut, a long way to go
Explanations for and implications of theExplanations for and implications of these patterns of progressse patterns of progress
How much explanatory value does an analysis of How much explanatory value does an analysis of political factors provide in accounting for variatiopolitical factors provide in accounting for variation in outcomes?n in outcomes?
What do these political factors and the results thWhat do these political factors and the results thus far suggest about how the process compares us far suggest about how the process compares to the European experience and the prospects for to the European experience and the prospects for attainment of eventual monetary integration in Eaattainment of eventual monetary integration in East Asia?st Asia?
Talk OutlineTalk Outline
Emergence of the ‘ASEAN+3’Emergence of the ‘ASEAN+3’ Examination of 3 areas of financial cooperExamination of 3 areas of financial cooper
ation focused on thus faration focused on thus far Explanation for greater and more rapid proExplanation for greater and more rapid pro
gress on bond issuegress on bond issue Assessment of political dynamics in East AAssessment of political dynamics in East A
sia compared to those in Europe on issues sia compared to those in Europe on issues of financial cooperationof financial cooperation
Situation prior to the 1997-98 ASituation prior to the 1997-98 Asian financial crisissian financial crisis
Increasing economic interdependence through traIncreasing economic interdependence through trade, direct investment and finance in regionde, direct investment and finance in region
But, unmatched by development of mechanisms But, unmatched by development of mechanisms and institutions for regional financial cooperationand institutions for regional financial cooperation
Most cooperation focused on trade and conducteMost cooperation focused on trade and conducted at sub-regional and supra-regional level (ASEAN d at sub-regional and supra-regional level (ASEAN and APEC)and APEC)
Motivations for the rise of the “AMotivations for the rise of the “ASEAN + 3”SEAN + 3”
Most proximate: Asian financial crisisMost proximate: Asian financial crisis Rise of regionalism elsewhere Rise of regionalism elsewhere (European Union, NAFTA, etc.)(European Union, NAFTA, etc.) Frustration with U.S. dominance of multilateral inFrustration with U.S. dominance of multilateral in
stitutions and a “hubs and spokes” model in registitutions and a “hubs and spokes” model in regionon
For ASEAN, important opportunity to get the “plus For ASEAN, important opportunity to get the “plus three” (particularly China and Japan) to talkthree” (particularly China and Japan) to talk
Differences with past regional inDifferences with past regional institution-building effortsstitution-building efforts
Participants: more exclusively “Asia”-- > exclusParticipants: more exclusively “Asia”-- > exclusion of U.S.ion of U.S. * Does excluding the U.S. mean that the grouping * Does excluding the U.S. mean that the grouping
assumes a competitive stance vis-à-vis the U.S. or assumes a competitive stance vis-à-vis the U.S. or U.S. dominated multilateral organizations? This is U.S. dominated multilateral organizations? This is a key question for U.S. policymakersa key question for U.S. policymakers
Role of ‘rise of China’ factorRole of ‘rise of China’ factor
3 financial sector initiatives3 financial sector initiatives Asian monetary fund-> currency swap network for Asian monetary fund-> currency swap network for
short-term liquidity supportshort-term liquidity support Mixed successMixed success
Common currency arrangementCommon currency arrangement Little progress (and certainly nothing concrete)Little progress (and certainly nothing concrete)
Asian bond marketAsian bond market Rapid developments forward in short period of time (oRapid developments forward in short period of time (o
ver past year and a half)ver past year and a half)
The Chiang Mai Initiative (CMI) oThe Chiang Mai Initiative (CMI) of May 2000f May 2000
Network of bilateral currency swaps among countriNetwork of bilateral currency swaps among countrieses
Seen by some as functional equivalent to an “AsiaSeen by some as functional equivalent to an “Asian Monetary Fund” n Monetary Fund”
Japan’s role as leader and arbitrator of intra-regionJapan’s role as leader and arbitrator of intra-regional interestsal interests
Outcome: 90% linkage to IMF program in place; revOutcome: 90% linkage to IMF program in place; review planned this yeariew planned this year
Key factor limiting greater regional independence: Key factor limiting greater regional independence: “surveillance” capacity“surveillance” capacity
Basic Elements of Bilateral Swaps Under Basic Elements of Bilateral Swaps Under Chiang Mai InitiativeChiang Mai Initiative
Modality: U.S. dollar and local currencies
Maturity: 90 days, renewable for up to 2 years
Drawing conditions: Activation linked to IMF programs but up to 10 percent may be disbursed without linkage to IM
F programs.
Interest rate: Market interest rate + premium
Other: Guarantee or collateral provided by the Government of country requesting the swap.
Source: Ministry of Finance, Japan
Exchange rate / currency coordiExchange rate / currency coordinationnation
Championed by Japan’s Ministry of FinanceChampioned by Japan’s Ministry of Finance Seen as route for internationalizing the yenSeen as route for internationalizing the yen
Study groups formed but little progressStudy groups formed but little progress Construct basket of regional currencies as an AsiConstruct basket of regional currencies as an Asi
an currency unit (like European currency unit in plan currency unit (like European currency unit in place 1979-98)?ace 1979-98)?
Little enthusiasm among actors, even in JapanLittle enthusiasm among actors, even in Japan Common currency arrangement seen to disproporCommon currency arrangement seen to dispropor
tionately benefit some members over otherstionately benefit some members over others View from outside the region? DisinterestView from outside the region? Disinterest
Underdeveloped bond markets iUnderdeveloped bond markets in Asia n Asia
(Hong Kong Institute for Monetary Research)(Hong Kong Institute for Monetary Research)
Effective but underused Hong KongSingapore
Effective but inefficient KoreaMalaysiaTaiwan
Semi-effective or blocked IndonesiaPhilippinesThailand
Underdeveloped China
Why the relative lack of depth or Why the relative lack of depth or activity in Asia’s bond markets?activity in Asia’s bond markets?
No shared singular explanation; constraintNo shared singular explanation; constraints differ across economies.s differ across economies.
Historically, private sector lobbying (often nHistorically, private sector lobbying (often non-Asian banks) has driven financial sector on-Asian banks) has driven financial sector reforms in these economiesreforms in these economies
Arguments for expanding Asia’s Arguments for expanding Asia’s bond marketsbond markets
Region may become less prone to contagion from eRegion may become less prone to contagion from economic shocks and shifts in sentiment if lessen ficonomic shocks and shifts in sentiment if lessen financial system reliance on banking sector and imprnancial system reliance on banking sector and improve the efficiency with which savings is mobilized.ove the efficiency with which savings is mobilized.
If bonds issued in local currencies or as an ‘Asian If bonds issued in local currencies or as an ‘Asian bond’, then also decreases currency mismatch probond’, then also decreases currency mismatch problemblem
US dollar’s 2002-2003 weakness suggests to AsiaUS dollar’s 2002-2003 weakness suggests to Asian investor that capital preservation may not be comn investor that capital preservation may not be compatible with a passive accumulation of U.S. gov’t bpatible with a passive accumulation of U.S. gov’t bondsonds
Shared goal: better dvlpt of local Shared goal: better dvlpt of local bond marketsbond markets
But, getting there is politically difficult for many gBut, getting there is politically difficult for many governments and requires passage of much legislovernments and requires passage of much legislation and high level of policy coordinationation and high level of policy coordination
Thus, regional cooperation efforts being viewed bThus, regional cooperation efforts being viewed by many individual country actors as drivers for doy many individual country actors as drivers for domestic reformsmestic reforms
Developments to date
Market evolving through a series of relatively low-profile and interlinked initiatives rather than through a single ‘big bang’
Rush of initiatives moving ahead of creation fo infrastructure to trade these instruments
Developments to dateDevelopments to date
Establishment of on “Asian Bond Fund” in June 2003 (for investing in dollar-denominated bonds) by EMEAP (managed by BIS)
Second and larger “Asian Bond Fund” (for investment in local currency bonds) to be launched in months by central bankers
Developments to dateDevelopments to date ASEAN+3 Finance ministers expected to an
nounce market-enabling initiatives in May (following up on 2002 “Asian Bond Fund Initiative” and establishment of working groups in summer 2003)
Thailand and South Korea plan unilateral initiatives
Multilateral entities plan to issue local currency bonds in China and Thailand
Division of labor in working toward creation oDivision of labor in working toward creation of regional bond marketf regional bond market
TaskTask ForumForum
Supply sideSupply side ASEAN+3 (ABMI), APECASEAN+3 (ABMI), APEC
Demand sideDemand side EMEAP (ABF-1, ABF-2)EMEAP (ABF-1, ABF-2)
Political supportPolitical support ACDACD
A division of laborA division of labor EMEAP (central bankers group)EMEAP (central bankers group)
Focus on demand side through establishing Asian bond fund Focus on demand side through establishing Asian bond fund (US$1 bil) with plans for 2nd fund now underway(US$1 bil) with plans for 2nd fund now underway
Idea initiated by Hong Kong Monetary AuthorityIdea initiated by Hong Kong Monetary Authority Goal: help alleviate exchange rate risk and buoy investor inteGoal: help alleviate exchange rate risk and buoy investor inte
rest in Asian bondsrest in Asian bonds Politically, relatively easy to do because involves investing sPolitically, relatively easy to do because involves investing s
mall amounts in EXISTING bonds and mall amounts in EXISTING bonds and US dollar- denominUS dollar- denominated foreign assets commonly held by all EMEAP central ated foreign assets commonly held by all EMEAP central banks so can draw on these.banks so can draw on these.
Political sensitivities anticipated, esp. in Japan, if move towaPolitical sensitivities anticipated, esp. in Japan, if move toward buying up large amts of assets with lower credit ratings thrd buying up large amts of assets with lower credit ratings than US Treasury bondsan US Treasury bonds
A division of laborA division of labor ASEAN + 3 Finance MinistersASEAN + 3 Finance Ministers
Focus on supply sideFocus on supply side Considering creation of an Asian credit guarantConsidering creation of an Asian credit guarant
ee institution and an Asian credit rating agency ee institution and an Asian credit rating agency Discussion of Japan Bank for International CooDiscussion of Japan Bank for International Coo
peration acting as guarantee institutionperation acting as guarantee institution
Role of other regional groups:Role of other regional groups:
APEC (led by HK, Korea and Thailand)APEC (led by HK, Korea and Thailand) Focus on securitization issuesFocus on securitization issues
ACDACD Includes IndiaIncludes India Provides political support for ideasProvides political support for ideas
Supplemented by individual counSupplemented by individual country effortstry efforts
Ex: Japan’s METI plans to set up a structurEx: Japan’s METI plans to set up a structure that provides guarantees for bonds issuee that provides guarantees for bonds issued in local currencies by Japanese companid in local currencies by Japanese companies operating abroad in Asia es operating abroad in Asia
Explaining the rapid progress on Explaining the rapid progress on the bond issuethe bond issue
FeasibilityFeasibility Domestic politicsDomestic politics Makes use of a number of issue-specific capabiliMakes use of a number of issue-specific capabili
ties (which differ from overall national capabilitieties (which differ from overall national capabilities)s)
More potential for positive sum aspect to cooperMore potential for positive sum aspect to cooperationation
Supportive or passive response by actors outside Supportive or passive response by actors outside the regionthe region
FeasibilityFeasibility
Asian bond fund less ambitious and more Asian bond fund less ambitious and more easily implemented than currency cooperateasily implemented than currency cooperation pact -- draws on existing foreign exchanion pact -- draws on existing foreign exchange reserves and amounts involved not very ge reserves and amounts involved not very largelarge
Issuing bonds in local currencies will be mIssuing bonds in local currencies will be more difficultore difficult
Foreign Currency Sovereign Debt Foreign Currency Sovereign Debt Long Term RatingsLong Term Ratings
(Source: Bloomberg Database; as of 27 Feb, 2004)(Source: Bloomberg Database; as of 27 Feb, 2004)
Moody’s Bond Rating S&P Bond RatingSingapore Aaa AAAJapan Aa1 AA-South Korea A3 A-China A2 BBB+Malaysia Baa1 A-Thailand Baa1 BBBPhilippines Ba2 BBVietnam B1 BB-Indonesia B2 B
Foreign Currency Sovereign Debt Foreign Currency Sovereign Debt Short-term RatingsShort-term Ratings
(Source: Bloomberg Database; as of 27 Feb, 2004)(Source: Bloomberg Database; as of 27 Feb, 2004)
Moody’s Bond Rating S&P Bond RatingJapan P-1 A-1+Singapore P-1 A-1+Thailand P-2 A-2South Korea P-2 A-2China P-1 A-2Philippines NP BVietnam NP BIndonesia NP B
Role of domestic politics/ politicRole of domestic politics/ political leadershipal leadership
THAILANDTHAILAND PM Thaksin a key proponent; creation of Asian PM Thaksin a key proponent; creation of Asian
bond market leads to nat’l press conferencebond market leads to nat’l press conference Motivation: silence domestic critics and emergMotivation: silence domestic critics and emerg
e as new leader within ASEAN?e as new leader within ASEAN? Importance of political leadership in bringing BImportance of political leadership in bringing B
ank of Thailand on boardank of Thailand on board
Role of domestic politics/ politicRole of domestic politics/ political leadershipal leadership
JAPAN:JAPAN: Typically, very little involvement on these types of issuTypically, very little involvement on these types of issu
eses But, (then) Finance Minister Shiokawa strongly supportBut, (then) Finance Minister Shiokawa strongly support
ive of EMEAP Asian Bond Fun idea because pushing Bive of EMEAP Asian Bond Fun idea because pushing BOJ liability structure in direction desired by gov’t (towarOJ liability structure in direction desired by gov’t (toward inflation targeting measures)d inflation targeting measures)
Even so, political involvement very low compared to ThEven so, political involvement very low compared to Thailand, Malaysia, etc.ailand, Malaysia, etc.
Role of domestic politics/ politicRole of domestic politics/ political leadershipal leadership
KOREA:KOREA: Leadership under Kim Dae-Jung but currently pLeadership under Kim Dae-Jung but currently p
olitical leadership lackingolitical leadership lacking BUT, other quasi-governmental actors (such as BUT, other quasi-governmental actors (such as
KAMCO) enthusiastically pushing forward bond KAMCO) enthusiastically pushing forward bond market issuesmarket issues
A number of countries possess A number of countries possess capabilities to contributecapabilities to contribute
Japan weak in domestic credit rating agentJapan weak in domestic credit rating agents, experience with secondary debt markets, experience with secondary debt markets, etc.s, etc.
But, Korea, Malaysia, and Thailand have mBut, Korea, Malaysia, and Thailand have more experience here. ore experience here.
-> Issue-specific capacities differ sigificant-> Issue-specific capacities differ sigificantly from aggregate economic capabilitiesly from aggregate economic capabilities
Infrastructure requirementsInfrastructure requirementsComponentComponent Best positioned to leadBest positioned to lead
Credible system of governance (esCredible system of governance (esp.strong and indep. regulator)p.strong and indep. regulator)
UnclearUnclear
Guaranteeing agencyGuaranteeing agency Japan ?Japan ?(Japan Bank for Int‘l Coop)(Japan Bank for Int‘l Coop)
Credible rating agencyCredible rating agency Korea and Thailand?Korea and Thailand?
Strong legal system w/ well-functioStrong legal system w/ well-functioning bankruptcy proceduresning bankruptcy procedures
UnclearUnclear
Developed base of natural buyers Developed base of natural buyers of long-term securitiesof long-term securities
JapanJapan
Reactions outside the region?Reactions outside the region? IMFIMF
SupportiveSupportive EuropeEurope
SupportiveSupportive U.S.U.S.
Passive stance Passive stance But, potential for concern?But, potential for concern? Detrimental impact on demand for US Treasury bonDetrimental impact on demand for US Treasury bon
ds unlikely until currency pegs eliminatedds unlikely until currency pegs eliminated
Why relatively more progress?Why relatively more progress?Summing upSumming up
Relatively easy to take small steps toward longer Relatively easy to take small steps toward longer term goalsterm goals
Supportive or passive reactions by external actorSupportive or passive reactions by external actorss
Neither Japan nor China is natural leader on all aNeither Japan nor China is natural leader on all aspects of infrastructure-building; potentially large spects of infrastructure-building; potentially large contributions by smaller economiescontributions by smaller economies
Coincidence with domestic political ambitions (esCoincidence with domestic political ambitions (esp. in Thailand)p. in Thailand)
Economic Capacities of ASEAN+3 Countries
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1990199119921993199419951996199719981999200020012002
Years
Percentage
China
Indonesia
Japan
Korea
All others
Comparing the East Asian and EuropeaComparing the East Asian and European Experiencesn Experiences
Diversity and heterogeneity of economies in regioDiversity and heterogeneity of economies in regionn Substantial economic convergence a prerequisite to jt Substantial economic convergence a prerequisite to jt
action at regional levelaction at regional level Political leadershipPolitical leadership
Differences in political systems and weak trustDifferences in political systems and weak trust No dominant power like U.S. in western hemisphere; nNo dominant power like U.S. in western hemisphere; n
or, a stable bipolar relationship like Franco-German allor, a stable bipolar relationship like Franco-German alliance in Western Europe. iance in Western Europe.
Comparing the East Asian and EuropeaComparing the East Asian and European Experiencesn Experiences
In Europe, Maastricht conditions for convergence In Europe, Maastricht conditions for convergence required relevant differences be eliminated as prrequired relevant differences be eliminated as precondition for participation in monetary union; to econdition for participation in monetary union; to offset consequences of diversity, compensation offset consequences of diversity, compensation mechanisms envisaged and financed.mechanisms envisaged and financed.
East Asia: efforts to proceed at regional level firsEast Asia: efforts to proceed at regional level first, hoping for regional developments to provide prt, hoping for regional developments to provide pressure for convergence on domestic actors; little essure for convergence on domestic actors; little discussion of compensation mechanismsdiscussion of compensation mechanisms
Comparing the East Asian and EuropeaComparing the East Asian and European Experiencesn Experiences
The desire for monetary union and establisThe desire for monetary union and establishment of euro served as focal pt in Europehment of euro served as focal pt in Europe
Private sector played a KEY role in EuropeaPrivate sector played a KEY role in European monetary integration/union but relatively n monetary integration/union but relatively silent in East Asiasilent in East Asia
Political integration was a clear goal in the Political integration was a clear goal in the European processEuropean process