World Business

Currency swaps, regional bond market better for Asia

By Lan Lan (China Daily)
Updated: 2010-05-13 10:12

BEIJING - Asian countries should promote regional economic cooperation by increasing currency swaps and setting up a region-wide bond market to secure the economic safety of the region as policymakers are grappling with the complicated financial puzzle caused by the sovereign debt crisis in Europe, economists said on Wednesday.

Asian countries like China and South Korea are seeing more inflows of hot money, as eurozone countries are becoming less attractive for investors due to the lasting uncertainties, they said.

The relatively stable fiscal and financial situation in Asian countries has attracted more capital flows, which will lead to risks such as asset bubbles and increasing inflation pressure, said Sun Lijian, an economics professor at Fudan University in Shanghai.

"The increasing liquidity will complicate the economic scenario and bring more challenges to policymakers," said Song Leilei, an economist with the Asian Development Bank in Manila.

Asian countries should focus on building a regional bond market, Song said, as it would help them obtain financing from the region and also bolster the regional economy, he said.

Moreover, countries in this region should take advantage of the currency swap arrangement under the "Chiang Mai Initiative", which took effect from March, to stabilize their financial and economic situation when crisis hit. The swap, agreed among the 10 members of the Association of Southeast Asian Nations, plus China, Japan and South Korea, amounts to $120 billion.

The Asian countries should further communicate and enhance the efficiency of such a mechanism, analysts said. A lesson that Asian countries should take from the sovereign debt crisis in Europe is to seize the opportune moment for rescue plans, instead of complaining and bargaining with each other, Sun said.

The withered markets in some European areas will affect consumer income and investment confidence, and subsequently drag on Asian countries' exports, which have just shown signs of recovery, said economists. Europe is a very important export market for Asia. It is, still China's top trade partner.

The fluctuating US dollar and euro also add to uncertainties for Asian economies.

However, analysts said at the current stage, it is not necessary for Asia to follow the International Monetary Fund and the EU in having a joint rescue mechanism, although some argue Asia could have its Asian Monetary Fund (AMF). The situation in Asia is very different from Europe, said economists.

"Asian countries don't have such high debts like the European economies, and the overall fiscal and financial prospects in this area still remain rosy," said Song.

Malaysia's debt accounts for roughly 53 percent of its 2009 gross domestic product (GDP), much lower than that of Greece. Vietnam and South Korea's debt are at about 30 percent of their 2009 GDP, while China's figure is even lower, he said.

Japan shoulders a heavy debt, which is almost twice the size of the nation's GDP.

The sources of debt in Asian countries are also very different from Greece, said Michael Pettis, a professor at Peking University's Guanghua School of Management.

He said the overall economic situation in Asia is still on a sound footing.