In March 2022, emerging East Asia’s local-currency bond market was worth $23.5tn. In 2005, the Asian Development Bank proposed the most ambitious attempt at regional financial co-operation: the Asian Currency Unit. A basket of the Asean+3 currencies, the ACU was devised as an anchor to which countries in the region could tether their own currencies, thereby deterring competitive devaluations and enabling countries in the region to float their currencies collectively against the US dollar. This would enable faster adjustment of current-account imbalances and promote regional trade and financial flows.
Building on the ACU idea, a group of Japanese economists devised a supplementary concept: the Asian Monetary Unit, whose value would reflect a weighted average of East Asian currencies. But, while Asian academics welcomed the proposals as possible first steps toward the creation of a common regional currency, neither the ACU nor the AMU has gained traction among policymakers. Unfortunately, Asian financial co-operation has been losing momentum in recent years for several reasons. First, the need for regional liquidity support has become less urgent. Most of the Asean+3 countries run current-account surpluses most of the time, and the region had accumulated some $3.7tn in foreign-exchange reserves by the time the global financial crisis erupted in 2008 – a more than six-fold increase from the $542 billion they held in 1997.
Second, although the Asian bond market has made impressive headway over the past ten years, the development of local-currency bond markets is driven by domestic financial needs rather than regional financial cooperation, and cross-border local currency bonds are rarely issued. In fact, individual countries’ financial development has significantly outpaced the development of infrastructure for the cross-border issuance of local-currency bonds. As a result, factors like non-standardised regulations, inadequate market liquidity, and a lack of an effective securities settlement system continue to hinder the development of cross-border issuance of local-currency bonds in the region. Third, since the Asian financial crisis, most East Asian countries have adopted a managed-floating exchange-rate regime. But none of them has pegged their currencies to a basket of East Asian currencies based on the ACU, largely because they are unwilling to accept constraints on their exchange rates for the sake of exchange-rate stabilisation among regional currencies. More broadly, greater economic and financial co-operation is vital to Asia’s long-term prosperity. The Asian financial crisis had begun. Unable to service their foreign debt, Thailand, Indonesia, and South Korea turned to the International Monetary Fund for support. But the IMF’s rescue packages were too little, too late, and came with excessively harsh conditions. East Asia, it increasingly appeared, would be better off saving itself. The region certainly had resources. Though some countries, like Thailand, were running current-account deficits, East Asia as a whole ran an external surplus. On July 2, 1997, the Thai baht collapsed. After waves of speculative attacks, the government had run out of foreign currency and become unable to support its exchange-rate peg to the US dollar. So, it floated the baht, which went into freefall. A wave of financial and non-financial Thai corporates that had borrowed heavily in dollars filed for bankruptcy.
