East Asian Financial Regionalism in Support of The Global Financial Architecture? The Political Economy of Regional Nesting

East Asian Financial Regionalism in Support of the Global Financial Architecture?
The
Political Economy of Regional Nesting
Author(s): William W. Grimes
Source: Journal of East Asian Studies , SEPTEMBER–DECEMBER 2006, Vol. 6, No. 3
(SEPTEMBER–DECEMBER 2006), pp. 353-380
Published by: Cambridge University Press
Stable URL: https://www.jstor.org/stable/23417934
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Journal of East Asian Studies 6 (2006), 353-380
East Asian Financial Regionalism

in Support of the Global
Financial Architecture? The Political
Economy of Regional Nesting
William W. Grimes
East Asian financial regionalism has advanced significantly since the rejection
of Japan's Asian Monetary Fund proposal in 1997. Key ASEAN+3 initiatives
include the Chiang Mai Initiative, which is designed to provide emergency liq
uidity to economies experiencing currency crisis, and the Asian Bond Market
Initiative, which seeks to develop regional bond markets. Surprisingly, these
initiatives—despite the assertive "regionalist" rhetoric that has surrounded
them and their intellectual origins in the analysis of the 1997-1998 Asian fi
nancial crisis—are explicitly designed to complement existing features of the
global financial architecture, including IMF conditionality and global financial
standards. The nesting of East Asian financial regionalism within the global fi
nancial architecture results from the political-economic interests of the leading
economies of the region. In the absence of a major change in the political-eco
nomic environment, nesting is a stable equilibrium and is unlikely to change.
Keywords: Chiang Mai Initiative, Asian Bond Market Initiative, financial re

gionalism, Japan, ASEAN+3, institutional design, East Asia
Eastars.1Asian regionalism
In recent years, books have is again
sought a hot
to "remap" it, totopic
place it among Western schol
in the context of an "American imperium," and to explain either its
construction or its "stunted" nature.2 In contrast with an earlier gener
ation of works that examined the possibility of an exclusionary Japan
led bloc,3 recent works situate East Asia as an integral region within a
global commercial or political system. Although suitably couched in
caveats and despite some concerns of a "spaghetti bowl" of overlap
ping trade agreements, the increasing consensus is that the ideal of
353

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
354 East Asian Financial Regionalism
"open regionalism" espoused by the Asia-Pacific Economic Coopera

tion (APEC) forum, so often derided as a mere catchphrase when pop
ularized in the 1990s, is a reasonable approximation of East Asia's
present and future.
This article, while broadly agreeing with that assessment, seeks to
advance our understanding of East Asian regionalism in three ways.
First, it focuses on the relatively understudied area of financial region
alism,4 whose dynamics differ considerably from trade-based regional
ism. Second, it demonstrates that current efforts are broadly supportive
of the global financial architecture,5 despite a rhetoric of self-help and
suspicion toward the International Monetary Fund (IMF) and financial
globalization in general. Third, it offers a political economy explana
tion of why this is so. This explanation is in explicit opposition to "re
gionalist" explanations that emphasize the role of identities and ideals
in the development of regional institutions.
To support this argument, I first sketch the relevant context, then de
velop the theoretical argument and explore alternative explanations,
map out financial regionalism efforts to date, analyze their degree of
conformity with relevant aspects of the existing global financial regime,
and consider what sorts of changes in core political variables might tend
to support or erode the current trend toward complementarity with the
global financial architecture.
Background
Much of the US academic and policy debate to date has focused on the
establishment of free trade agreements (FTAs) and economic partner
ship agreements. This is certainly an interesting turn in the trade poli
cies of the countries of East Asia, but the focus on trade obscures the
growing impact of efforts on the financial side. Since the 1997 Asian
financial crisis (AFC), serious efforts have begun to deepen financial
regionalization in East Asia and to create institutions to avert future
currency crises.
East Asian financial regionalism is developing in a rather different
economic context from that of regional trade efforts. As is widely
known, the East Asian region enjoys a high and growing share of world
trade while also seeing an increasing proportion of intraregional trade.6
Much of this is based on a regional division of labor in which compo
nents and capital goods are heavily traded intraregionally, following pat
terns of foreign direct investment (FDI), and final goods are shipped pri

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
William W. Grimes 355
marily to the developed economies of North America, Japan, and Eu

rope in roughly equal amounts.7 The regional division of labor has cre
ated incentives for lowering intraregional trade barriers, but the impor
tance of extraregional economies as customers and as suppliers of FDI
and technology has made exclusionary arrangements extremely unat
tractive. Thus, although the rhetoric of "open regionalism" is no longer
in the air, it is a reasonable characterization of reality, despite the poten
tially pernicious effects of overlapping regional and bilateral FTAs with
nonstandardized rules of origin.
In contrast to the regional integration seen in the real economy, from
a financial point of view, East Asia is characterized by small and frag
mented markets with problematic access to outsiders and by currency
regimes much more oriented toward stabilizing against the US dollar
than against regional currencies. (This remains true despite the an
nouncements by the Malaysian and Chinese central banks in July 2005
that they had shifted from dollar pegs to currency basket-based sys
tems.)8 Meanwhile, East Asia is the world's foremost supplier of surplus
savings, the largest ongoing purchaser of dollar assets, and a major mar
ket for global financial institutions.
As relatively open economies with a high degree of dependence on
extraregional markets, the East Asian economies clearly have much to
gain from the creation of institutions to promote financial coordination
and integration, to reduce vulnerability, and to enhance development
and growth; but prior to 1997 few effective regional economic organi
zations of any sort existed.9 The AFC of 1997-1998 inspired regional
states to begin to establish such organizations in earnest. Financial re
gionalism has been central to the efforts to address the lessons of 1997.10
The almost universal sense in East Asia that the IMF and the United
States were unresponsive and sought to protect their own prerogatives
rather than to help the economies afflicted by the crisis has been a pow
erful motivator for all concerned. Japan's early responses in the form of
the 1997 Asian Monetary Fund (AMF) proposal and the 1998 New
Miyazawa Initiative provide particular insight into contemporary moti
vations as well as lessons that could be applied subsequently.11 Key el
ements include dissatisfaction with US-dominated approaches (both the
IMF packages themselves and the Manila Framework process),12 a will
ingness of Japan to provide massive sums of money to ensure regional
stability, and an explicitly regional approach to stabilization. The AMF
proposal itself failed due to opposition from the United States, China,
and the IMF, as well as to deep nervousness among potential borrower
governments who feared that creating such an institution might inspire

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further attacks on their currencies. The official reason for US and IMF
opposition was that the AMF would promote moral hazard, a claim that
was strenuously contested at the time by the Japanese authorities who
proposed it. Despite the failure of the original proposal, the ideal of a re
gional approach to financial stabilization retained its appeal, leading
eventually to contemporary financial regionalism. (Ironically, however,
the Chiang Mai Initiative, which is the most direct descendant of the
AMF proposal, has implicitly accepted moral hazard concerns in its im
position of an "IMF link," as described below.)
There are four major streams of East Asian financial regionalism:
1. Emergency liquidity provision, through the Chiang Mai Initia

tive (CMI). The CMI significantly supplements the amount of
funds that can be mobilized in the event of a crisis as a supple
ment to IMF lending.
2. Development of regional bond markets through the Asian Bond
Market Initiative (ABMI) and the Asian Bond Fund (ABF).
3. Improved communication, in the form of surveillance, policy
dialogue, informal contacts, and various "Track II" projects.
4. Currency management. Ideas about regional currency stabiliza
tion and even the eventual development of a regional common
currency have gained attention, but remain at the earliest stages
of discussion.
While several aspects of the AMF have been jettisoned since 1997,
one thing that has not changed is the effective definition of the region.
Serious financial regionalism is primarily to be found in the efforts by
the Association of Southeast Asian Nations plus China, Japan, and the
Republic of Korea (ASEAN+3). These efforts are supplemented by
central bank cooperation in the form of the Executives' Meeting of East
Asia-Pacific Central Banks (EMEAP), which includes New Zealand,
Australia, and Hong Kong in addition to the eight core ASEAN+3
countries (Indonesia, Malaysia, the Philippines, Singapore, and Thai
land, plus China, Japan, and South Korea). While there have been some
efforts through the APEC forum, they are nowhere near as developed
as those of the ASEAN+3 despite the apparent preferences of the US
government.
On a functional level, East Asian financial regionalism is meant to
respond very directly to the lessons of the Asian financial crisis. The
main lessons that governments in the region have drawn from that
episode are that dollar pegs and short-term borrowing in foreign cur

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
rendes are very dangerous,13 and that little support can be expected
from the IMF and the United States in the event of a crisis.14 Indeed,
regionalism can in some ways best be seen as a defensive measure
against US influence, based on a common nationalist analysis that sees
the United States and globalization as greater threats to national auton
omy even than historical enemies.15 Nonetheless—and surprisingly,
given the rhetoric of nationalism and insulation—East Asian financial
regionalism is generally supportive of stated US goals and of the exist
ing global financial architecture. This is the puzzle I present here. To
explore these issues, I focus in the remainder of the article on the CMI
and regional bond initiatives, which is where the most concrete steps
have been taken.
Argument
The question I address in this article is: Given the rhetoric of insulation
from financial globalization in post-AFC financial regionalism efforts,
why have the main efforts of the ASEAN+3 in this period been ones
based on transparency and complementarity to global financial
arrangements?
I argue that ASEAN+3 financial regionalism efforts since 2000 have
been complementary to or supportive of the global financial architecture,
despite arising from very different core motivations. Broadly speaking,
the East Asian states have been driven by a motivation to reduce their vul
nerability to global finance rather than to maximize market efficiency.16
Within that broad consensus, however, differences remain that require
careful political economy analysis. The interests of potential creditor
states (especially Japan) and major investors within them have led those
states to push for transparency and third-party enforcement. However,
they have been unable to completely dictate terms to counterpart states
that resist such principles based on their own—differing—interests. As
a result of the tensions implicit in this situation, a distinct pattern of am
biguities, differential rates of policy change, and unilateral defensive
strategies have arisen alongside or within the general regional commit
ment to transparency and deference to judgments of the global financial
institutions.
The basic breakdown of interests is to be found along two dimen
sions: creditor versus borrower and advanced versus developing finan
cial system. In the case of emergency liquidity provision, all member
states share a common interest in ensuring that sufficient funds are

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available to avert or resolve a crisis. However, preferences regarding in

stitutional design are primarily determined by whether a state is likely to
be a lender or borrower of emergency liquidity. Lenders are more likely
to be concerned with provisions to minimize the likelihood of crises and
maximize the ability of borrowing states to pay them back (i.e., reduc
ing moral hazard), while borrowers are most interested in ensuring ac
cess to large amounts of foreign exchange as quickly as possible.
In bond market initiatives, both dimensions come into play. Again,
there are common interests in improving the functioning of national fi
nancial markets. But within that simple consensus, economies with large
capital surpluses are most interested in access to efficient and transpar
ent capital markets into which their investors can easily invest and from
which they can repatriate their holdings, whereas likely recipients of fi
nancial investment must weigh the trade-off between access to foreign
capital on the one hand and domestic political concerns and fears of cap
ital flight or currency crisis on the other. Interests are somewhat com
plicated by the level of development of a given economy's financial sys
tem; states with more advanced systems and players see competitive
opportunities in the growth of developing country bond markets.
To reiterate, the variation in specific interests exists despite the
general preference among most of the participating states in favor of in
sulation of their own domestic financial systems from the forces of
global finance.17 While that general preference motivates the establish
ment of regional financial cooperation, specific interests determine the
forms initiatives take. In the case of the CMI, which can be effective
only if states commit massive sums of money, the likely creditor states
(especially Japan and China) clearly have the upper hand in institu
tional design, and indeed the CMI is effectively structured to protect
their interests. However, the governments of potential currency crisis
economies have simultaneously pursued unilateral defensive mecha
nisms in the form of massive foreign exchange reserve positions, at
least partly because of concerns about IMF conditionality.
In the case of bond market initiatives, a more complicated dynamic
is at play, in which developing markets must fear competition from
more advanced markets (i.e., dominance of US, Japanese, or European
financial institutions in their local markets and/or replacement of do
mestic bond markets by regional markets centered in Tokyo, Singapore,
or Hong Kong) at the same time that they cannot develop without ac
cess to the advanced markets' surplus capital and market expertise.
This contributes to more ambiguous and variable commitment to global
financial norms than in the case of the CMI.18

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Chiang Mai Initiative: Confronting Currency Crisis
The rationale behind the CMI is that speculative attacks on the curren
cies of Thailand and other AFC economies in 1997 were successful be
cause foreign exchange reserves were insufficient to cover capital out
flows.19 In the weeks of negotiation required to secure a rescue package
through the IMF, the crisis deepened and spread. The CMI aims to pro
vide massive liquidity rapidly in order to stem such effects.
The CMI was agreed on by ASEAN+3's finance ministers in May
2000 and was fully in place by the end of 2003. Based primarily on a
network of bilateral swap agreements among participants, the CMI is
set up so that crisis countries are able to borrow predetermined amounts
of their counterparts' reserves for a period of ninety days (renewable
for up to two years) to supplement their own foreign reserves (see Fig
ure 1). When a member country experiences a currency crisis, it can
draw on these funds rapidly and without conditions during the period
in which it is negotiating an IMF standby agreement.20 In May 2005, in
Istanbul, ministers further agreed to double the size of available funds
and to strengthen the initiative in several ways.
The CMI involves real money, comparable to the amount of the
failed Japanese proposal for an Asian Monetary Fund in 1997. By the
time the Istanbul agreement is fully implemented, the sum of all the
swap arrangements will exceed $80 billion. More important, countries
facing a speculative attack, even without having an actual IMF standby
agreement in effect or having to negotiate with third parties, will have
funds available to them under the CMI in amounts that dwarf their IMF
quotas. Thailand, for example, will have access to over $6 billion in
CMI swaps once the Istanbul agreement is fully incorporated into its
bilateral swap agreements—four times its IMF quota of special draw
ing rights (SDR) 1.08 billion (approximately $1.5 billion).
An important aspect of the CMI, however, is the IMF link, which
dictates that only 10 percent of funds (increasing to 20 percent as the Is
tanbul agreement is fully incorporated into swap agreements) can be re
leased without the approval of the IMF. This does not mean that an IMF
agreement must have already been reached, as has sometimes been
stated21—only that the IMF certifies that the crisis country is negotiat
ing a standby agreement in good faith. Thus, instead of the one-month
lag typically involved in preparing and agreeing on an IMF plan, CMI
money can potentially be released in days. (Separately, the Bank of
Japan has also concluded "peacetime bilateral swap arrangements" with
its counterparts in China and Korea to provide emergency liquidity in an

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
360
Source:MinstyofFinace,Jpn.ht:/w.mofgjp/enlishf/CMI_0654.pdfUateonMy4,206;acesdAugt3,206. Notes:a.Dubl-idearowsnteBSAwihrcpoalmitens.Excpwherot isned,rcpoalBSAsreymtic—.e,ahsdcomit pr b.Inadito heJapn-MlysiBSAunderthCMI,Japniscomtedan itolBSAwithMalysunderthNwMiyaz Intive(US$2.5blion) c.LoalcurenyswapbetwnJap ndChia,equvlntohestadolarmount. d.Localurencyswapbet nChiandthePilpnes,quivalentohestadolramunt. e.LocalurencyswapbetwnChiandKorea,quivlentohestadolarmount. f.DolarcuenyswapfromJntKoreaf$10bilonadfrmKoeatJpnf$5bilo.Adtnaly,herisocalurenyBSAquivalento$6bi,wth g.ThesumofUS$75bilncudesthBSAbwen(a)Chi dTaln (b)ChiandMlysi,bothfwicareuntlydergotianfrewal,but h.TeamountfdlarcuenyswapfromJantohePilpns$6bilonadfrmthePilpnstoJapnis$0.5blon i.TheamountfdlarcuenyswapfromJantoSigpres$3bilonadfrmSingaporetJanis$1blon. j.ItwasgredinApril205tha eAS wasexpnde toUS$2bilon.
Figure1NtworkfBilaterSwapArngemts(BSA)UnderthCiangMInitave(CMI) videhalfteoalstedfunstohet rincaseon xperincsaurencyris. eachsideoblgatedoprvideth quivalentof$3bilon lca urency. doesnticludethBSAunderNwMiyazwInitavendthASENwapArngemt(AS).

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
emergency that is not a currency crisis, such as a terrorist attack or a nat

ural disaster.)
In addition to the IMF link, there is also a lesser-known aspect of
enforcement—in fact, as of this writing, it has not been stated publicly
by any of the participating governments. The bilateral swap agree
ments, whose texts have not been released to the public, contain per
formance criteria that function as preconditions for release of CMI
funds. The exact content of these performance criteria vary from agree
ment to agreement. Japan's original swap agreements typically stipu
lated a level of foreign exchange reserves and in some cases country
bond ratings, depending on Japanese policymakers' assessment of their
counterparts' long-term balance of payments situations. As of 2005,
these were not standardized among CMI swap agreements. Practically
speaking, these requirements have little or no effect, since all the
Chiang Mai participants maintain foreign exchange reserves well
above the three or four months of exports that are typically stipulated.
An additional element is surveillance, known formally as "eco
nomic review and policy dialogue," which is meant to prevent coun
tries from following policies that might invite speculative attacks on
the currency.22 It consists of discussion at multiple levels about each
country's policies (at the working level approximately bimonthly, at the
ministerial level twice yearly), but it is much less structured and thor
ough than IMF Article IV surveillance. Country presentations follow
no set format, and there is no third-party investigation or verification.
There is, moreover, no enforcement mechanism beyond peer pressure
and nonbinding, informal cautions.
The ASEAN+3 finance ministers did agree to a set of significant in
stitutional enhancements to the CMI in May 2005 in Istanbul. The most
important of the changes was a "significant increase in the size of swaps,"
of up to 100 percent of bilateral swap arrangements. Second, the IMF link
will be reduced from 90 percent to 80 percent of the funds provided.
These changes should be fully reflected in the various bilateral swap
agreements by the end of 2006. (Since the Chiang Mai Initiative is not a
multilateral swap agreement, each of the bilateral agreements must be
renegotiated by the concerned parties to incorporate changes of any sort.)
There have also been some moves toward multilateralization of networks,
such as designating a "coordinating country" that will aggregate funds
and manage swaps in case of an emergency instead of relying purely on
bilateral action. Nonetheless, several major issues remain, such as treat
ment of nonlinked funds and harmonization of agreements and conditions
for potential borrowers. And despite its importance from a functional per

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
spective, the Istanbul agreement has not substantively changed the CMI.
In particular, it leaves unclear how far the IMF link is to be reduced.
Nurturing Bond Markets: Asian Bond

Market Initiative and Asian Bond Fund
The second major pillar of East Asian financial regionalism is the pro
motion of local-currency bond markets. Regional initiatives seek to ad
dress a second lesson of the Asian financial crisis: the "double mis
match" problem. In the aggregate, savers in East Asian economies have
been investing a significant part of their savings in foreign currency
(primarily dollar-) denominated assets. They have then borrowed the
money back in short-term dollar-denominated loans and bonds and ap
plied the funds to longer-term domestic investments whose returns are
in the local currency. The result has been mismatches in terms of both
maturity and currency, thus making countries highly vulnerable to
movements in the value of the dollar.23 In the 1997 crisis, the freefall of
local currencies versus the dollar made repayment of debt impossible
and, in turn, fed back into further declines in currency values in a self
reinforcing downward spiral. It has been suggested that if capital mar
kets had provided more opportunities for domestic long-term financial
intermediation in local currencies within the East Asian emerging mar
kets, the crisis may not have occurred or at least would not have been as
severe.24 Expansion of bond markets is also seen as an important ele
ment in improving financial intermediation within the hitherto bank
based economies of East Asia. The main regional efforts in promoting
bond markets are ASEAN+3's Asian Bond Market Initiative and the
Asian Bond Fund of the regional central banks (EMEAP). While there
is some* overlap between the two, ABMI is mostly concerned with in
frastructural improvement, while ABF focuses on increasing liquidity in
East Asia's developing bond markets.
Asian Bond Market Initiative
The ABMI is putatively meant to help create regional bond markets but
can be better understood as two distinct but related projects: develop
ment of domestic bond markets over the medium term and attempts to
create regional markets in the more distant future. In order to have truly
regional markets, there would have to be a high level of harmonization
of policies among the economies, better intraregional currency settle
ment, efficiently operating local-currency bond markets already in ex

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
William W. Crimes 363
istence, and full capital liberalization. It is unlikely that all these con
ditions will be met in the near future.
For all these reasons, it makes much more sense to focus on AB Mi's
goal of developing local-currency bond markets within countries. Local
bond markets in East Asia are generally not very highly developed, al
though they have been growing rapidly. For the most part, emerging
market bond markets in Asia are based on government bonds of rela
tively short maturity that are bought and held to maturity by institutional
investors and financial institutions.25 They do not fulfill some of the
basic functions of financial markets, let alone the more ambitious goals
proclaimed in ABMI. They do not provide enough information to sup
port efficient price formation (i.e., a robust yield curve for default-risk
free assets) because liquidities even for government bonds are low. And
since investors require much higher risk premiums in order to buy bonds
under such conditions, bond issuance has been unattractive as a financ
ing method even for blue-chip firms. Most East Asian markets do not
even begin to create opportunities for small and medium-sized enter
prise (SME) financing, which is one of the major goals of the initiative.
In addition, there are problems of transparency and data.
The problem of developing domestic bond markets can be viewed
in terms of both liquidity issues and infrastructural issues. While ABMI
seeks to address both aspects, it is more feasible for government poli
cymakers and regulators to address the infrastructural issues. For the
most part, the actual work of ABMI consists of working group discus
sions and research studies on those issues, although there have been
limited demonstration projects that involve actual money. Led by the
efforts of Japan's Ministry of Finance, the ASEAN+3 members have
identified a number of important impediments to development of do
mestic bond markets in East Asia, such as lengthy approval processes
for bond issuance, unclear default rules, lack of hedging instruments,
difficulties in issuing asset-backed securities, problems of disclosure,
and weak local ratings agencies, among others.26
As just one example of how financial regulations make bond markets
costly and inefficient, it is worth considering one of Japan's ongoing ef
forts under ABMI. The government-owned Japan Bank for International
Cooperation (JBIC) began negotiating to issue straight local-currency
bonds in Thailand and China in mid-2004 with the dual purpose of im
proving local market liquidity and raising local currency to fund the baht
or renminbi component of its local infrastructure projects. A one-shot
Thai baht bond issue was not achieved until September 2005, and the
Chinese bond issue was still being negotiated as of June 2006. The slow
ness of the process apparently reflected a combination of legal ambiguity

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
and bureaucratic conservatism in the host countries; regardless of the

causes, the negotiation processes, especially with China, have not been
encouraging to ABMI proponents.27
Some regional governments (notably, South Korea and Malaysia)
have made impressive strides in creating efficient and attractive bond
market infrastructures, although it is difficult to link these improvements
to the ABMI per se. Meanwhile, participating officials have come up
with a number of technical assistance and demonstration projects to try
to push forward further improvements in ASEAN+3 bond markets.
Nonetheless, not only do significant obstacles remain, but many of those
obstacles will be far more costly or politically sensitive to surmount than
those that have already been met.
Turning from infrastructure to liquidity, the ASEAN+3 governments
have also been promoting local-currency bond issues by official actors
(as in the JBIC case noted above) and various "credit enhancement"
schemes. Public sector credit enhancement primarily means issuing guar
antees for private sector bonds in order to reduce firms' cost of financing.
For example, JBIC provided a secondary credit guarantee for a baht-de
nominated bond issue by Isuzu Motors' local affiliate in Thailand in June
2004. ABMI also seeks to improve legal infrastructures to allow for more
effective private sector credit enhancement, such as asset-backed securi
ties (especially collateralized debt obligations).28 However, while there
have been some demonstration projects on both the regional and national
levels, they remain few in number and minimal in impact.29
Asian Bond Fund
A separate effort to spur regional bond markets' liquidity can be seen in

the Asian Bond Fund efforts of EMEAP. The first iteration of ABF in
volved the joint purchase by member central banks of a total of $1 bil
lion worth of dollar-denominated sovereign debt in the emerging-market
economies of EMEAP (i.e., not including Japan, Australia, or New
Zealand), which not surprisingly had no noticeable effect on liquidity of
regional bond markets.
ABF 2, which was formally established in early July 2005, instead
invests in local-currency-denominated public sector bonds. The effort
is meant to enhance liquidity both by engaging the mechanism of cen
tral bank purchases of East Asian local-currency bonds and by making
it easier and more attractive for private investors to purchase such
bonds. ABF 2 is privately managed and passively traded, based on an
index created by the prominent London-based International Index
Company.30 The central banks themselves have invested $2 billion in

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
the form of a closed-end fund. However, there are parallel open-end

funds that are open or will soon be open to private investors, including
a diversified regional fund and eight single-country funds.31 At least
initially, officials see Japanese financial institutions as well as Asian
local institutional investors of all sorts as the target customers, but the
participation of major Western financial institutions in the design and
management of the funds is meant to be reassuring for US and Euro
pean investors as well.32
A key goal is to establish benchmarks for regional bonds, which is
essential to the creation of robust yield curves and thus more efficient
interest rate formation for private sector bond issues. It is still too early
to know whether ABMI and ABF 2 will be effective in achieving their
goals; in the end, it will depend on private sector interest in East Asian
currency-denominated assets, since the central banks' investment is
both small and passive.
So far, the most tangible change wrought by ABF is that it has en
couraged central bank cooperation regarding financial markets.33 This
is important because central banks are often the domestic financial reg
ulators in their own countries. For example, in China, ABF negotiations
led to steps to allow foreigners to purchase bonds in the interbank bond
market (where 80 percent of bond trading in China takes place) and
then to be able to take their money out of the country up to a (publicly
unspecified) limit.
Despite the efforts of both ASEAN+3 and EMEAP, however, there
are likely to be important limits to the development of large and liquid re
gional bond markets, for both economic and political reasons. Because of
the small size of most domestic economies and the lack of international
usefulness of their currencies, it is likely that most Asian markets will be
of limited attractiveness to foreigners.34 While it is true that local-cur
rency bonds from non-Asian developing countries such as Mexico and
South Africa have become popular with global institutional investors, the
risk premiums are relatively high and the range of assets purchased is
limited. East Asia may have better opportunities for attracting interna
tional investors, but the same basic dynamic will likely apply. The sheer
size of the Chinese economy means that it will probably be home to a
substantial bond market in the long run if rapid economic growth and in
frastructural investment persist and its market infrastructure improves
significantly. But unless a given country's currency itself is attractive to
investors as a store of value, it is hard to imagine high liquidity in local
currency bond markets in most of Asia.
Developing regional markets that trade in a regional currency or
synthetic currency would in theory address that problem, and some

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
Japanese academics in particular have developed the concept of an

Asian Currency Unit (ACU) for that purpose.35 More recently, the Asian
Development Bank (ADB) under President Kuroda Haruhiko has an
nounced an intention to create an ACU as an indicator of regional cur
rency movements, but as of June 2006 those efforts remained bogged
down in organizational politics after nearly six months. Like the former
European Currency Unit (ECU), the ACU would be a weighted basket
of currencies, whose value would fluctuate with changes in the value of
its components. But whatever the eventual impact of the ADB exercise,
from a financial markets perspective, currency-basket bonds have never
been popular with investors, because they are difficult to handle and
price and are not essential for diversification strategies.
Complementarity and Ambiguities
In evaluating complementarity with the global financial architecture,

the main principles at stake in East Asia are economic stability, devel
opment of financial opportunities, and equal access. Institutionally, we
need to look at whether rules and modes of cooperation are nested
within global arrangements or are functionally independent or even
competing.36 Regional efforts so far have been made clearly subordi
nate to the rules and judgment of the IMF and the guidelines of the
Bank for International Settlements. Here, I argue that we should expect
considerable reluctance to move away from the umbrella of these
regimes or from global financial standards. Nonetheless, ambiguities
and contradictions remain, reflecting the sometimes divergent national
interests laid out in the "Argument" section above.
The most profound potential political and economic challenges
that East Asian financial regionalism might pose for the global finan
cial architecture are to be found in the future of the Chiang Mai Initia
tive. The CMI involves large amounts of money, which could form the
basis of regional reserve pooling and potentially a weakening of IMF
(or, more broadly, global) input into regional macroeconomic manage
ment. The size of the CMI—and even more so its potential size, given
the extraordinary reserves held by Japan and China—make it a poten
tial rival to the IMF.37 However, it would only really undermine the
IMF system if its standards of credit provision were substantially dif
ferent. But the clear incentive for the major likely creditors of Japan
and China is to maintain third-party enforcement in order both to en
sure institutional credibility and to shield themselves from unwanted
political criticism in an emergency. Both the current arrangements and

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the economic incentive structure for leading governments suggest that

institutional rivalry of the sort that many observers saw in the AMF
proposal is unlikely.
Nonetheless, the question of whether the CMI will be transformed
into something more closely resembling the original Asian Monetary
Fund proposal is an important one for evaluating the utility of my ex
planation, especially given that many of the people who are most pub
licly associated with this effort keep saying that it should (including
Kuroda Haruhiko, president of the ADB and former Japanese vice-min
ister of finance for international affairs).38 The sheer size of the overall
funds available keeps such speculation alive, as does the continued re
sentment of AFC crisis countries toward the IMF. Such a transformation
would be a fundamental shift in the relationship between ASEAN+3
financial regionalism and the global financial architecture.
The core of what makes the CMI not a retread of the Asian Mone
tary Fund concept is the decisionmaking process—in other words, pri
marily the IMF link. For the foreseeable future, problems of surveil
lance and enforcement make the IMF link highly attractive to Japan
and China. There are considerable political costs to reserve-rich states
in denying requests for money from crisis countries or attempting to at
tach their own conditions. But the promise of money without the threat
of conditions creates a situation of moral hazard. This is why the IMF
link exists in the first place. There have been no developments in the
region that should change the interests of Japan and China anytime
soon in retaining this link. Even regional enthusiasts within the Japa
nese Ministry of Finance are unwilling to predict when conditions may
allow the link's elimination.39 Chinese officials are apparently even less
enthusiastic.40
ASEAN governments, particularly Thailand and Malaysia, have been
strongly in favor of reducing the IMF link much more aggressively. How
ever, China and Japan have consistently balked at raising the level of non
linked funds to a level at which a state experiencing a currency crisis
might actually be tempted to draw on them. There is also some reason to
believe that the link is in the interests of likely borrower countries as well
as creditor countries, since the IMF link reduces uncertainty about the
availability of funds in a crisis and lends credibility to the Chiang Mai
swap system. Potential crisis economies may prefer the certainty that goes
with the IMF link to the prospect of speculative attacks meant to test the
CMI's credibility.41 If so, that would strengthen even more the status quo.
As for surveillance, while useful in monitoring policies, particularly
during noncrisis periods, lack of an internal enforcement mechanism
means limited effectiveness in the absence of third-party enforcement.

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
There is indeed no formal enforcement mechanism within the

ASEAN+3, which works on a consensus basis. In fact, it is hard to
imagine any decisionmaking process that would work well in the
ASEAN+3 context, whether on efficiency grounds (unanimity or ma
jority) or on political grounds (supermajority, quota-based voting, or a
veto for Japan and China), unless it involves third-party certification. In
the absence of a viable autonomous regional institution, only the IMF
can fulfill that role. Regional stability and support of global arrange
ments go hand in hand in this case and closely match the financial and
political interests of Japan and China, the dominant actors in the CMI.
While I have demonstrated the CMI's complementary relationship
with the global financial architecture, the practical question remains of
whether it will be effective in preventing and stopping currency crises.
It is, of course, unpredictable how the CMI will work in an actual crisis,
although the simplicity of the mechanism and the large sums of money
involved are encouraging. Nonetheless, potential crisis countries have
shown a deep ambivalence about depending on either the IMF or their
ASEAN+3 partners, as seen in two key aspects of currency manage
ment. First, states have accumulated massive foreign exchange reserves;
while China and Japan have received the most notice because of the
sheer magnitude of their reserves, their CMI partners have reserves
ranging from 15 to 18 percent of GDP for Indonesia and the Philippines,
to over 30 percent for Thailand and South Korea, to nearly 60 percent
for Malaysia, to around 100 percent for Singapore.42 This constitutes an
extraordinary investment in "insurance" against currency attacks by de
veloping economies that could clearly make productive use of capital at
home rather than investing in US Treasury bonds.43 Second, the CMI
economies have all at least formally adopted floats, managed floats, or
currency basket systems, making them less of a fixed target for specu
lative attacks. (Until recently, the exceptions had been Malaysia and
China, both of which have now announced currency basket systems.
While China's renminbi has hardly varied against the dollar, tight capi
tal controls provide insulation against currency crisis.)
Turning to the bond market initiatives, here too we see broad com
plementarity with the global financial architecture—but also with am
biguities and differential rates of policy change among economies. In
their conception and rhetoric, the ABMI and ABF appear to comport
perfectly with the visions of the United States and the IMF for finan
cial development and liberalization. Both see efficient, well-regulated
financial markets as key to a financial system that functions well over
all, since excessive reliance on bank finance invites problems, includ

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
ing maturity mismatches, higher transaction costs, and managerial or

regulatory failure. They also anticipate that vibrant financial markets
will inevitably call for greater financial liberalization both internally
and externally, thus promoting greater efficiency and nonpreferential
access to markets. Strikingly, the language of both ABMI and ABF doc
uments is purely market-oriented, without a hint of the insulation-ori
ented rhetoric regionalist approaches would expect.
Ambiguities remain, however, based on differing state interests.
One is the potential issue of equal access. Global standards provide the
basis for discussion and policy recommendations in the ASEAN+3, re
flecting the interests of key players such as Japan. However, it is at least
possible that financial liberalization and market development will come
to favor local or regional financial actors at the expense of foreign or
extraregional investors and financial institutions. Nondiscrimination
against foreigners (especially Westerners) is likely to be politically dif
ficult at various times and in various countries in East Asia;44 more
over, political and judicial systems that are based as much on rule by
law as on rule of law are inherently susceptible to favoritism of all
sorts. East Asian countries with relatively advanced financial systems,
such as Japan, Singapore, and perhaps South Korea, share an interest in
equal access in the region, but their direct leverage on other states' poli
cies is still limited to peer pressure in ASEAN+3 surveillance. This is
an area in which varying rates of change are to be expected, and indeed
efforts have been stop-and-go and highly variable. Approvals processes
for bond issuance and entry restrictions for underwriters or primary
dealers, for example, provide particular opportunities for favoritism.
Another obstacle to development of regional (and, practically
speaking, local) markets is that capital liberalization is indispensable but
often seen as costly by developing country policymakers. Without sub
stantial foreign participation, most East Asian bond markets are doomed
to be small and illiquid. But the Asian financial crisis demonstrated the
dangers of capital liberalization without proper sequencing and financial
supervision, in the form of vulnerability to hot money flows and specu
lative attacks. It may be some time before the emerging economies of
East Asia are prepared to fully liberalize capital flows again.45
Yet another difficulty on the way to the creation of vibrant bond
markets is that costs of bond market infrastructure development are
high, especially in promoting the goal of more efficient financing
mechanisms for SMEs. To do that, the working groups of the ABMI
have been promoting asset-backed securities and a variety of other
forms of internal and external credit enhancement, but the knowledge

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and legal bases are not fully in place anywhere other than in Japan,
South Korea, and Singapore. Effective hedging instruments promise to
be even more difficult to develop.46 Japanese financial institutions have
been particularly active in promoting asset-backed securities, presum
ably sensing business opportunities, but development of such markets
has meaningfully proceeded only in Japan and South Korea.
Finally, with regard to global financial standards, ASEAN+3 finan
cial regionalism clearly does not support policies of insulation but rather
is complementary. Indeed, the ABMI working party on ratings agencies
has spent a great deal of time working with less developed countries' fi
nance ministries to ensure that their domestic financial institutions will
be able to meet the Basel II requirements.47 Another issue on the table
has been how to implement or adopt international accounting standards
to local conditions. But here again, ASEAN+3 governments have been
picking and choosing according to their own preferences.
Geostrategic Complications
So far, my political analysis has focused on states' economic interests.

But financial regionalism touches on strategic issues as well, particu
larly when we consider possibilities of changes in the regional or global
political-economic environment. For the ASEAN+3 governments both
individually and collectively, financial regionalism can be considered
from the perspective of hedges and levers. For example, the threat of
the elimination of the IMF link may prove to be a useful lever on the
part of the ASEAN+3 as a group to make the IMF behave in a manner
that the Asian economies prefer. There is precedent for this in the way
the 1997 AMF proposal put pressure on the IMF and its board of di
rectors to be forthcoming toward some of the proposals of the Japanese
government, including rapid implementation of quota increases, estab
lishment of the Contingent Credit Lines, and expansion of other credit
facilities.48 The CMI might also form the basis of an ASEAN+3 voting
bloc within the IMF.49 Meanwhile, the existence of an institutional
framework that could be adapted to more exclusively regionalist pur
poses is in and of itself a hedge against future exclusion or pressure
from global organizations or other regional blocs.
More broadly, it makes sense to consider how financial regional
ism fits into relations among Japan, China, and the United States. In the
long run, realists expect two trends that will be relevant to East Asian
financial regionalism: a contest for regional influence between Japan
and China, and efforts by China to weaken US alliances in the region.

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Japan, increasingly sidelined in East Asia by China's rapid economic

rise and deft political maneuvering as well as its own "history prob
lem," needs to maintain strong political and economic relations with
the United States as the basic guarantor of its security and as a key (if
decreasingly central) economic partner.
The challenge for the East Asian states, especially Japan, is to keep
the United States involved in the process of regional financial cooper
ation (and economic cooperation more generally), but not in decision
making. This will likely involve some delicate balancing among the
various functions of financial regionalism as hedge, lever, and nested
regime within the global financial architecture. For governments such
as Japan's and Singapore's that see the United States as a strategic
hedge against possible domination by a rising China, the most practical
way to reassure the United States while keeping it away from the table
will be to consciously invoke the legitimacy of the international finan
cial institutions. Thus, for the moment at least, strategic concerns rein
force the political economy analysis. Opportunities for future shifts are
considered in the following section.
Conclusion
The initiatives discussed in this article are ambitious and well thought
out. And there is considerable enthusiasm in Japan and other East Asian
countries about the ways in which they will change and shape the East
Asian (and global) economies. However, there may be natural limits to
the progress of some regional financial efforts. In my analysis, it is the
Chiang Mai Initiative that has made the most impressive gains, while
other initiatives are inherently much more difficult. The ABMI is tak
ing an extraordinarily ambitious goal and starting from a very low base,
so failures should be expected along the way. Similarly, with regard to
surveillance, it is hard not to be skeptical of its effectiveness in the ab
sence of an enforcement mechanism. As long as ASEAN+3 surveil
lance relies on moral suasion and consensus, the only effective disci
pline will come from markets and CMI's IMF link.
This article has demonstrated that the key elements to date of
ASEAN+3 financial regionalism are supportive of the existing global fi
nancial arrangements. This is in many ways a surprise, given the rhetoric
that has often been employed by regional political leaders, regional
analyses of the IMF response to the 1997-1998 crisis, and the principles
underlying the 1997 Asian Monetary Fund proposal. But more funda

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mentally, the development of a meaningfully open regionalism (or, as

Peter Katzenstein puts it, "porous region"50) in East Asia over the last
two to three decades has created strong incentives to do so. At least for
the medium term, those economic and political incentives should persist.
An alternative to the political economy explanation, for which I
have used the shorthand of "regionalist" above, is that complementar
ity is simply a short- to medium-term tactic in the incremental process
of creating truly regional solutions.51 This explanation draws its inspi
ration from the experience of the Asian financial crisis and the Japanese
proposal to create an Asian Monetary Fund in 1997.52 Essentially, the
argument is that, since that time, displeasure with the US/IMF vision of
unbridled financial globalization has prevailed throughout the region—
including, preeminently, Japan—and has led to a series of efforts to in
sulate East Asian political economies. Even if current efforts appear to
be in conformity with the US/IMF vision, they are based on a funda
mentally different conception of the roles of states and markets, and
states will in time shift their regional financial cooperation away from
such conformity as the necessary institutional building blocks are grad
ually put in place.
While there is evidence in favor of the regionalist approach, ulti
mately it does not fully explain the pattern of East Asian financial re
gionalism as well as the political economy approach I have laid out. In
particular, it is not convincing in explaining why states might go against
their apparent material interest for the sake of constructed ideals of eco
nomic management.
Like most regional cooperation efforts, East Asian financial region
alism responds to a variety of pressures and functions while covering a
broad range of activities by member states. It exhibits characteristics of
hedging against the IMF and against regionalism in Europe and the
Americas, contributing to the confusion over whether it is supporting
the global financial architecture or is in some way in opposition. But
while key players have used financial regionalism to signal their dis
pleasure with the IMF and US responses to the events of 1997-1998, as
well as with aspects of the current global architecture, regional states'
powerful incentives to profit from economic globalization are reflected
clearly in the institutional design of regional financial initiatives.
Before closing, it may be useful to hazard a glimpse into the future
as a means of drawing a final distinction between my own explanation
and the regionalist alternative. I do so by asking under what circum
stances the key CMI creditor states of Japan and China could be in
duced to drop the IMF link. Although it is unlikely that this would be

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in either country's economic interest in the foreseeable future, strategic

decision by one party or another might lead to that outcome if key ele
ments of the political-economic environment were to shift. For exam
ple, it is imaginable that an ineffective or counterproductive IMF re
sponse to a crisis in East Asia could so anger ASEAN+3 governments
that they would decide that the costs of regional inaction exceed those
of regional action.53
A more intriguing possibility is that strategic political objectives
might trump economic interests. One can imagine Chinese leaders de
ciding to advocate elimination of the Chiang Mai Initiative's IMF link
as a means of isolating Japan in East Asia or increasing US-Japan ten
sions. This would put Japan in the position of either angering its South
east Asian partners by vetoing elimination or injuring its own economic
interests and creating a breach with the United States by going along.
Although China's economic interests would also be harmed by elimi
nation, its leaders may well see that as an acceptable risk to take if the
timing were right to seriously handicap the US or Japanese position in
East Asia. It is by no means inevitable (or even, perhaps, likely) that the
Chinese government would carry out such an action, but it is possible.
It is also worth noting that this is an asymmetric threat in that it is not
available to Japan, whose primary political and military ally for the
foreseeable future is the United States.
The exercise of considering future changes in the relationship be
tween the Chiang Mai Initiative and the IMF is interesting because it
makes us think about our criteria for expecting change in the substance
of financial regionalism. The political economy approach sees the com
plementarity of East Asian financial regionalism to the global financial
architecture as a stable equilibrium that is unlikely to change without a
strong external impetus. While I have left open the possibility of a fun
damental shift away from support of the global financial architecture,
the mechanism of such a shift is quite different from that envisaged by
regionalist explanations. Regionalists see such a shift as both more
likely and less contingent on specific environmental changes. The ar
gument presented here is that new issue linkages would need to be
formed to other pressing concerns of the ASEAN+3 countries; Only
with changes in costs and benefits should leading states seek to alter in
stitutional design.
William W. Grimes is associate professor of international relations at Boston

University. He is the author of Unmaking the Japanese Miracle (2001) and
coeditor of Japan's Managed Globalization (2002). He has written articles on

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
Japan's political economy, foreign economic policy, and foreign relations and
is currently working on a book manuscript, tentatively titled A Yen for Asia?
Japan's Role in East Asian Financial Regionalism.
Notes
I am grateful to the US Department of Education for a Fulbright-Hays Faculty

Research Grant and to Boston University for sabbatical leave in 2005. The Pol
icy Research Institute of the Japanese Ministry of Finance provided an office,
logistical support, and visiting scholar status during that time. Thanks are also
due to the Japanese government officials, central bankers, and economists who
agreed to be interviewed, sometimes repeatedly, on the subject of East Asian
financial regionalism. Joseph Grimes, Yves Tiberghien, Stephan Haggard, and
two anonymous reviewers provided comments on drafts of this article. Audi
ences at seminars and lectures in Japan and the United States also offered use
ful comments and criticism. I alone am responsible for any remaining errors of
fact or analysis.
1. There has been considerable debate over how to define or identify "re
gions" and indeed whether the concept is even useful. Here, I make no effort
to problematize the East Asian region. Instead, I define East Asia as core
ASEAN+3, which is the locus of self-identified regional financial cooperation.
2. T. J. Pempel, ed., Remapping East Asia: The Construction of a Region
(Ithaca: Cornell University Press, 2005); Peter Katzenstein, A World of Regions:
Asia and Europe in the American Imperium (Ithaca: Cornell University Press,
2005); John Ravenhill, APEC and the Construction of Pacific Rim Regionalism
(Cambridge: Cambridge University Press, 2001); Gilbert Rozman, Northeast
Asia's Stunted Regionalism: Bilateral Distrust in the Shadow of Globalization
(Cambridge: Cambridge University Press, 2005); Edward Lincoln, East Asian
Economic Regionalism (Washington, DC: Brookings Institution, 2004).
3. Offering various contemporary assessments are David Arase, Buying
Power: The Political Economy of Japan's Foreign Aid (Boulder: Lynne Rien
ner, 1995); Walter Hatch and Kozo Yamamura, Asia in Japan's Embrace (Cam
bridge: Cambridge University Press, 1996); and Jeffrey Frankel and Miles
Kahler, eds., Regionalism and Rivalry: Japan and the United States in Pacific
Asia (Chicago: University of Chicago Press, 1993).
4. One exception is C. Randall Henning, East Asian Financial Coopera
tion (Washington, DC: Institute for International Economics, 2002).
5. Or, to follow Aggarwal's categorization, that regional arrangements are
"substantively" rather than just "tactically" linked to the global regimes in a
nested arrangement. Vinod Aggarwal, "Reconciling Multiple Institutions: Bar
gaining, Linkages, and Nesting," in Vinod Aggarwal, ed., Institutional Design
for a Complex World (Ithaca: Cornell University Press, 1998), pp. 1-31.
6. Japanese authors drawing on the IMF Direction of Trade Statistics state
that, as of 2004, intraregional trade in East Asia was 53.4 percent, compared to
65.7 percent in the EU and 43.9 percent in NAFTA. These numbers are some

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
what problematic, for three reasons: (1) the EU and E

larger number of economies than NAFTA, which bias
upward; (2) the East Asia numbers include Hong Kon
can best be seen as double-counting, due to its entrep
East Asia numbers include Taiwan, which is specifica
cooperation efforts. However, the general point rema
7. Mitchell Bernard and John Ravenhill, "Beyond
ing Geese: Regionalization, Hierarchy, and the Indu
World Politics, 47, no. 2 (1995): 171-209.
8. Ogawa Eiji, "AMU: Higashi Ajia no kawase s
shite" (AMU: Toward East Asian currency policy co
at the Research Institute of Economy, Trade, and In
Summary available at www.rieti.go.jp/jp/events/bbl
9. The lack of formal institutions has been widel
ample, Pempel, Unmapping; Katzenstein, World of R
"Japan in East Asia: Institutions and Regional Leaders
and Takashi Shiraishi, eds., Network Power: Japan
University Press, 1997), pp. 197-233. Lincoln, East
comprehensive, albeit deeply skeptical, overview of
tions; see especially his Chapter 8 regarding the AFC
10. This point was made over and over to me in
views with Japanese Ministry of Finance officials, a
the summer of 2005.
11. Space constraints preclude a detailed treatment here. For a more thor
ough summary and analysis, see Saori Katada, Banking on Stability (Ann
Arbor: University of Michigan Press, 2001); Jennifer Amyx, "Japan and the
Evolution of Regional Financial Arrangements in East Asia," in Ellis Krauss
and T. J. Pempel, eds., Beyond Bilateralism: US-Japan Relations in the New
Asia-Pacific (Stanford: Stanford University Press, 2004), pp. 198-219; and
Young Wook Lee, "Japan and the Asian Monetary Fund: An Identity-Intention
Approach," International Studies Quarterly 50, no. 2 (2006): 339-366.
12. The Manila Framework Group was created in 1997 as a subgroup of
APEC in the aftermath of the AMF proposal. Based on a US initiative, the
Manila Framework focused on surveillance and early warning of potential
crises. Despite some talk of setting up an emergency financing facility through
the group (Henning, East Asian Financial Cooperation, p. 64), the process was
superseded by the Chiang Mai Initiative and essentially withered away.
13. There has been a great deal of writing on this point, particularly by Asian
economists. See, for example, the various essays in Takatoshi Ito and Yung Chul
Park, eds., Developing Asian Bondmarkets (Canberra: Asia Pacific Press, 2004);
Robert McCauley, "Unifying Government Bond Markets in East Asia," BIS
Quarterly Review (December 2003): 89-98; Naoyuki Yoshino, Sahoko Kaji, and
Tamon Asonuma, "The Optimal Weight and Composition of a Basket Currency
in Asia: The Implications of Asymmetry," SC MS Journal of Indian Management
2, no. 4 (2005): 74-87; Morris Goldstein and Philip Turner, Controlling Cur
rency Mismatches in Emerging Markets (Washington, DC: Institute for Inter

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
national Economics, 2004); and Barry Eichengreen and Ricardo Hausmann,

eds., Other People's Money: Debt Denomination and Financial Instability in
Emerging Market Economies (Chicago: University of Chicago Press, 2005).
14. As one recent example, Thailand's minister of finance, Thanong Bi
daya, made the following statement in a symposium in Tokyo in May 2005:
The US responded passively to the Asian Crisis, compared to the speed and ef
fort which it had responded to the Mexican Crisis. In addition, the IMF con
ditionality was not appropriate to the crisis-effected countries because of the
lack of true understanding of the situation and underlying economic condition.
Other forums of cooperation such as APEC had played no significant role in
solving the crisis. These lessons reminded us of the importance and necessity
of a stronger regional cooperation. ("Future of Asia" conference, sponsored by
the Nihon Keizai Shimbun, Tokyo, May 25-26, 2005; text of speeches avail
able at www.nni.nikkei.co.jp/FR/NIKKEI/inasia/future/2005/index.html)
15. Lee, "Japan and the AMP'; William W. Grimes, "Internationalization

as Insulation: Dilemmas of the Yen," in Ulrike Schaede and William W.
Grimes, eds., Japan's Managed Globalization: Adapting to the 21st Century
(Armonk, NY: M. E. Sharpe, 2002), pp. 47-76; William W. Grimes, "Interna
tionalization of the Yen and the New Politics of Monetary Insulation," in
Jonathan Kirshner, ed., Monetary Orders: Ambiguous Economics, Ubiquitous
Politics (Ithaca: Cornell University Press, 2003), pp. 172-194.
16. In this sentence, "market efficiency" is used in the microeconomic sense.
However, as Stephan Haggard has pointed out in a personal communication,
there is a good Keynesian efficiency argument to be made for avoiding sharp cap
ital movements that can have a serious effect on macroeconomic outcomes.
17. Grimes, "Internationalization as Insulation" and "Internationalization
of the Yen."
18. It should also be noted that the CMI is a relatively simple coordina
tion problem among eight state actors, while the efforts through ABMI and
ABF to create bond markets require the development of complex infrastructure
and the attraction of a multitude of market participants on both buy and sell
sides.
19. Except where otherwise noted, facts about the CMI, ABMI, and ABF
are from Japanese Ministry of Finance (MOF) and Bank of Japan (BOJ) brief
ing documents and interviews with MOF and BOJ officials.
20. Two caveats to the conditionality point apply. First, IMF support typ
ically involves a range of conditions, and CMI funds can be seen as piggy
backing on those conditions; however, in the period between activation of
swaps and final IMF agreement, there are in fact no conditions. Second, if cri
sis countries refuse to go to the IMF, they are limited to 10-20 percent of the
amounts of their swap agreements, and access to funds is at the sole discretion
of the lending government. This might create de facto conditionality. See
below on the IMF link.

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
21. Jennifer Amyx, "A Regional Bond Market f

ing Political Dynamics of Regional Financial Coope
Papers, No. 342 (Canberra: Australia-Japan Researc
tional University, 2004), p. 5.
22. Japanese policymakers and analysts tend to
veillance as the key to advancing regional financia
Nemoto, "An Unexpected Outcome of the Asian Fi
University Program on US-Japan Relations Monog
pp. 23-24). Following the Asian financial crisis, th
tempts to come up with objective criteria that woul
ate to predicting currency crises in East Asian econo
the IMF had basically misunderstood both the crisis a
See, for example, the reports of the Kobe Study Gro
Europe Meeting (ASEM) in 2001. Institute for Intern
(IIMA), Executive Summary of Research Papers an
search Project (Tokyo: Institute for International
available at www.mof.go.jp/jouhou/kokkin/tyousa/t
have been unsuccessful to date.
23. The currency mismatch has been mostly eliminated in recent years in
the ASEAN+3 economies, according to their "aggregate effective currency
mismatch indexes"; see Asian Bonds Online, a service of the Asian Develop
ment Bank, http://asianbondsonline.adb.org. There is some debate over the
proper measurement of mismatches, as discussed in Goldstein and Turner,
Controlling Currency Mismatches, especially Chapters 2 and 3. It is beyond
the scope of this article to evaluate the appropriateness of the ADB figures, but
there has clearly been significant improvement.
24. This claim is debatable, as Park and Park argue. Yung Chul Park and
Daekeun Park, "Creating Regional Bond Markets in East Asia," in Takatoshi
Ito and Yung Chul Park, eds., Developing Asian Bondmarkets (Canberra: Asia
Pacific Press, 2004), pp. 16-66. However, there is a clear consensus among
those economists and policymakers actually involved in ABMI that lack of
local-currency bond markets contributed to the crisis. See also McCauley,
"Unifying Bond Markets"; Goldstein and Turner, Controlling Currency Mis
matches; Barry Eichengreen, Ricardo Hausmann, and Ugo Panizza, "Currency
Mismatches, Debt Intolerance and Original Sin: Why They Are Not the Same
and Why It Matters," National Bureau of Economic Research Working Paper
No. 10036, October 2003.
25. Statistics on composition, maturity, and turnover are available at Asian
Bonds Online.
26. Ministry of Finance mimeo, "Ajia saiken shijö ikusei inishiatibu"
(Asian bond market initiative), June 2005.
27. Personal interviews with JBIC and MOF officials; "Role and Recent
Development: JBIC International Financial Operations," JBIC mimeo, July
2005; "JBIC Provides Thai Baht Two-Step Loan: First Asian Currency Loan
Under ABMI," JBIC press release, September 15, 2005, www.jbic.go.jp.

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
28. For a study of Japanese financial institutions' preferences in this re

gard, see Institute for International Monetary Affairs (IIMA), "Ajia tii okeru
saiken shijö kenkyùkai" (Asia bond markets study group), Tokyo, March 2005.
29. As of this writing, there have been only four AB MI private sector bond
issues, two in 2004 and two in 2006. Three involved JBIC secondary credit
guarantees on bond issues by Japanese companies' subsidiaries in Thailand,
Malaysia, and Indonesia. The other was a yen-denominated collateralized debt
obligation of the receivables of a group of South Korean SMEs, guaranteed by
the Industrial Bank of Korea and JBIC and issued in Singapore in December
2004. As a further cautionary tale, in June 2005, the Thai government reversed
its plan to issue a dual-currency (yen-baht) bond in favor of a straight yen bond
because of pricing concerns caused by lack of enthusiasm among its target pur
chasers in Japan.
30. International Index Company is a joint venture of ABN Amro, Bar
clays Capital, BNP Paribas, Deutsche Bank, Deutsche Börse, Dresdner Klein
wort Wasserstein, HSBC, JP Morgan, Morgan Stanley, and UBS Investment
Bank.
31. ABF 2 funds are split between the regional fund (Pan Asia Bond Index
Fund, or PAIF) and a Family of Bond Funds (FoBF) comprising the eight
country funds. The structure may appear to be unnecessarily complicated, with
PAIF essentially replicating the FoBF. However, the hopes for private sector
participation differ by type of fund. PAIF is meant to provide an overall Asian
currency index product denominated in US dollars that will encourage in
vestors to see the East Asian bond markets as a coherent unit. Since it is listed
in Hong Kong, there are no restrictions on sales, purchases, or repatriation of
proceeds. The country funds are denominated in local currencies and are meant
to provide a low-cost vehicle for those who prefer to make their own alloca
tions across economies. Potential investors are subject to applicable local laws.
Investor differentiation among country funds could also be a spur for countries
with less attractive bond funds to seek to improve their offerings. As for cen
tral bank holdings, both PAIF and FoBF holdings are meant to be reallocated
among country funds on a periodic basis. Guonan Ma and Eli Remolona,
"Opening Markets Through a Regional Bond Fund: Lessons from ABF 2," BIS
Quarterly Review (June 2005): 81-92; "EMEAP Central Banks Announce the
Launch of the Asian Bond Fund 2," EMEAP press statement, December 16,
2004; State Street Global Advisors, "Prospectus: ABF Pan Asia Bond Index
Fund," June 28, 2005; personal interviews with BOJ and MOF officials.
32. Personal interviews.
33. Ma and Remolona, "Opening Markets"; personal interview with BOJ
official.
34. On the relationship between market size and liquidity, see McCauley,
"Unifying Bond Markets," pp. 92-94.
35. See, for example, Itö Takatoshi, "Ikinai kawase antei e zenshin"
(Progress toward regional currency stability), Nihon keizai shimbun, July 29,
2005. See also the Asian Monetary Unit project of the Japanese government's

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
Research Institute of Economy, Trade, and Industry

amu/en/index.html.
36. Aggarwal, "Reconciling Multiple Institutions
37. It is true that the governments participating i
to Borrow (GAB) and the New Agreement to Bor
ways created a parallel IMF for the developed coun
that the world's richest countries would have to d
arrangements or on the IMF to defend their curre
NAB are fundamentally different from the CMI. Th
Mechanism, in both its iterations, also differed in t
East Asian Financial Cooperation, pp. 69-74.
38. Kuroda Haruhiko, Tsuka no köbö: En, doru, yü
(The rise and fall of currencies: The fate of the yen,
(Tokyo: Chüö Köronsha, 2005); Masahiro Kawai, "
gionalism: Progress and Challenges," Journal of A
(2005): 29-55. The idea is also contained in a de fact
map for CMI (MOF mimeo). The second stage of CM
gotiation) calls for a "collective decision-making mec
regional cooperation" entry calls for "enhanced surv
ization," both of which are essentially code words
tonomous institution without the IMF link. Efforts to create an ASEAN+3 sec
retariat within ADB are related to this goal as well.
39. This statement may seem odd, given that I have just identified Kuroda
Haruhiko as an important backer of the "regionalist" approach. The solution to
the seeming contradiction is that Kuroda's view is no longer dominant within
the International Bureau of the Ministry of Finance. From 2004 to 2006, other
than the vice-minister for international affairs himself, it would be difficult to
identify more than three or four of the dozen or so International Bureau offi
cials who have occupied relevant positions at the office director (shitsuchö)
level or higher as pursuing an assertively "regionalist" approach to financial
cooperation and only one as anything other than a cautious gradualist. (On the
other hand, see Nemoto, "Unexpected Outcome.")
40. Personal interviews.
41. Interviewees were reluctant to go on the record about country differ
ences in negotiations, but it is interesting that Malaysia and Thailand have been
the most publicly vocal on the need to drop the IMF link. By virtue of both
macroeconomic management and reserve positions, by far the most likely
economies to fall into crisis in the near future are Indonesia and the Philip
pines, which have been much less publicly antagonistic to the IMF link.
42. IMF, International Financial Statistics Yearbook. As a note, Singapore
is clearly using a significant proportion of its "reserves" as an investment ve
hicle rather than as a currency defense mechanism.
43. For some countries, such as China and Japan, these reserves can bet
ter be understood as a mercantilist attempt to prevent or moderate appreciation
of their currencies. This seems not to be a major motivation for the likely cri

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC
sis economies of Southeast Asia, however. There, the insurance metaphor ap

pears to be more convincing.
44. For a discussion of nationalist sentiment in Thai and Malaysian policy
discourse in the wake of the Asian financial crisis, see Natasha Hamilton-Hart,
"Thailand and Globalization," in Samuel Kim, ed., East Asia and Globaliza
tion (Lanham, MD: Rowman & Littlefield, 2000), pp. 187-208; Anne Marie
Murphy, "Malaysia and Globalization," in Samuel Kim, ed., East Asia and
Globalization (Lanham, MD: Rowman & Littlefield, 2000), pp. 209-232.
45. There are exceptions, of course. According to Ma and Remolona,
"Opening Markets," Malaysia has "essentially restored the regime that was in
place before it imposed capital controls during the Asian crisis" (p. 88).
46. IIMA, Ajia. The existence of effective hedging instruments will also in
vite entry of hedge funds, which will likely be unattractive to many ASEAN+3
financial regulators.
47. MOF and BOJ interviews. The crux of this issue is that, in the absence
of well-functioning bond markets and sophisticated ratings agencies in a given
country, it will be essentially impossible for domestic banks to execute proper
risk weighting. This may make them ineligible for international activities and
put them at a disadvantage domestically relative to foreign banks.
48. Katada, Banking on Stability; Henning, East Asian Financial Cooper
ation, p. 74.
49. It might be argued in this regard that Japan would be unlikely to vote
against its own interests just for the sake of ASEAN+3 solidarity. But one
major objective of weaker states that enter into collective agreements with
more powerful ones is exactly to constrain their options. Perhaps more likely,
ASEAN+3 solidarity could provide cover for Japan to follow its own prefer
ences if they conflicted with those of the United States.
50. Katzenstein, World of Regions.
51. Nemoto, "Unexpected Outcome," pp. 23-24, suggests this explicitly,
albeit with much hedging.
52. Kuroda, Tsuka no köbö\ Sakakibara Eisuke, Keizai no sekai seiryokuzu
(Map of world economic power) (Tokyo: Bungei Shunjü, 2005). A theoreti
cally sophisticated political science treatment in this vein of the formation of
the AMF proposal can be found in Lee, "Japan and the AMF." Kawai, "East
Asian Economic Regionalism," also more or less fits into this category. Grimes
compares this version of Japan's national interest with domestic political econ
omy and strategic realist alternatives in William W. Grimes, "Japan's Regional
Turn to Stabilize the Yen" presented at American Political Science Association
Annual Meeting, Philadelphia, September 1, 2006.
53. There are, of course, other possibilities. Miscalculation can never be
dismissed as a possibility. Alternatively, given the size of CMI funds, it may
become politically unattractive or even unsustainable to continue to cede con
trol over their disbursal to the IMF. But these and other possibilities are harder
to treat systematically as outgrowths of a consistent approach to analysis, so I
do not pursue them here.

133.11.204.55 on Mon, 26 Oct 2020 13:29:46 UTC

East Asian Financial Regionalism in Support of The Global Financial Architecture? The Political Economy of Regional Nesting

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