The Brazilian crisis and the birth of the euro have focused attention in Asia on a critical question: Should the region's nations adopt new currency regimes? At one extreme are those touting currency-board pegs to the U.S. dollar, as practiced by Argentina and (less strictly) Hong Kong, as a way to avoid trauma. At the other are those who see in the euro an example Asia must follow if it is not to be tied to U.S. or European monetary coattails. In between are those searching for pragmatic ways of achieving exchange-rate stability, fostering regional identity and creating currency regimes that fit their economic needs and trade profiles.
One thing is clear: in the future, no one in Asia is going to follow the currency-board model, in which money supply is directly linked to foreign-currency holdings. Hong Kong is waiting for an opportunity to dismount this beast, which helped save it from the worst shocks suffered by South Korea and Thailand a year ago but which is now delivering a recession likely to last much longer than those of most of its neighbors. Even Joseph Yam, chief executive of the Hong Kong Monetary Authority, has come out in favor of a single Asian currency as a long-term goal.
But a single currency for the region is pie in the sky. Adopting one would require either the political and institutional integration achieved in Europe, which is unthinkable in Asia for at least the next century, or one currency's domination of the region. With two giant countries--Japan and China--competing for pride of place, the latter outcome is impossible. Japan's economy is not big enough, and its demographics will limit future growth. China's primitive financial structure, relatively low level of economic development and uncertain political stability would rule out the dominance of the renminbi, even if Beijing were to permit free movement of capital.
So is Asia stuck? Will the region's countries forever have to let their currencies float freely on a stormy global sea--or gyrate against each other as each links with its own unique combination of dollars, euros and yen? There is an alternative. The region can chart a path toward currency stability by creating an Asian Monetary Fund to supplement the IMF, just as the Asian Development Bank reinforces the World Bank. This would not be revenge for the IMF's wrong-headed policies in Asia during the crisis. It would be recognition that the IMF lacks the resources to be the global lender of last resort, a role to which it aspires. The Asia-Pacific region has a capital surplus and thus should not need outside currencies to serve as intermediaries for most capital movements, as is the case today.
Member states of an Asian Monetary Fund would subscribe according to the size of their GDP and foreign trade. Subscriptions would be in their own currencies, or in another's if their own is not convertible. The fund's unit of account would be the Asia Currency Unit (ACU), whose value would be a trade-weighted basket of member currencies. The convertible Asian ones would be represented directly in the basket, the non-convertibles by their rates against "special drawing rights," a multi-currency unit of account. Members would not peg their currencies to the ACU (though that could be an option), but would instead use it as the primary reference point for their national currency regimes. All AMF loans would be denominated in ACUs.
The yen would have to be the core of any such arrangement, because of Japan's weight in regional trade and investment. Indeed, the yen would already be playing a greater role had Tokyo responded more positively at the outset of the Asian crisis in 1997 and had the U.S. not so vigorously opposed Japan's proposal to create an Asian intervention fund, which Washington feared would undermine both its role and that of the IMF.
Indeed, the yen is beginning to look healthier. Most Asian currencies have already moved away from dollar links, and Japan has belatedly been injecting state funds into the region. Tokyo's Big Bang financial reforms are improving prospects for its capital market. Liberalization of other such markets--including Korea's and Singapore's, both of which are sensitive to the yen's value--increases the likelihood that huge capital flows within Asia will in the future be denominated in regional currencies.
Of course, creating such an arrangement would require a certain degree of political will. Above all, China would have to accept that being linked more closely to the yen is no more demeaning than its current arrangement of informally tying its renminbi to the dollar. But the benefits of such a regime are obvious. It could stabilize exchange rates while keeping foreign-exchange and capital markets open. It would bring Asian exchange reserves to bear on regional problems. And it would provide financial muscle to promote Asia's own interests in keeping trade and capital flowing freely.
Philip Bowring is a Hong Kong columnist and consultant