The Difficult Road Towards Monetary Integration in Asia

Updated On: Mar 31, 2006

A senior official of the Asian Development Bank (ADB), Mr Masahiro Kawai, the head of ADB’s regional integration office, has warned that Asian governments should not take the continued stability of the US dollar for granted.

Instead they should appreciate their currencies through joint efforts. The governments in East Asia have the largest foreign reserves in the world but most of these funds are invested overseas, particularly the USChina has reportedly overtaken Japan to become the world’s largest holder of foreign exchange reserves, with US$853.7 billions as of February.

This call comes in the midst of the run-up of a US Treasury publication to Congress on whether any country in the world is unfairly manipulating its currency to gain unfair advantages against US companies. The US Treasury is expected to publish its report on 15 April, just days before Chinese President Hu Jintao visits Bush.

The ADB has also said on Monday (27 March) that it would be working towards the creation of a Asian Currency Unit (ACU) which would be an index of currencies, similar to the European Currency Unit (ECU). The ECU was the forerunner of the Euro. ADB is still examining which currencies to include in the ACU and the relative weights. The creation of the ACU is seen as part of the ongoing efforts to promote monetary and financial cooperation in East Asia after the Asian Financial Crisis in 1997-98.

It is likely the ACU could be a useful denominator for bond issues and facilitate the development of a Asian multi-currency bond market. It would also deepen capital markets, a move which would reduce external monetary shocks. This would also help the region to use some of their financial reserves for investments (particularly infrastructural projects) at home as pointed out earlier by ADB’s Vice-President Liqun Jin at the Mekong Development Forum held in Singapore on 8 March.

However, ADB President, Haruhiko Kuroda has emphasised, in an earlier interview, that any single Asian Currency like that of the Euro is likely to be decades away. He said that such a single currency is a “very remote possibility.” He explained that, “Before we can realistically envisage any single currency, we have to have a single market as the European experience shows.”  

Also many issues still remain unresolved and may become politicised.  While the ACU is likely to be based on ASEAN plus Three countries, it is uncertain as to whether the Indian rupee would also be included. And already there were potential heated argument over whether the Taiwanese dollar should be included.

Another potentially difficult issue is how the weights of the various currencies should be calculated- whether by gross domestic product, trade flows or financial transactions or a combination of the various elements.


“Pulling numbers out of the air; The ADB’s Report on East Asia’s Financial Development employs a statistical Sleigh of Hand that Does the Region No Good.”  The Business Times [Singapore], 30 March 2006

“Collective Regional Effort will Prevent Currency Crises: ADB; Joint Appreciation would Reduce Dependence on Dollar’s Stability”, The Business Times [Singapore], 29 March 2006

“Bush Administration Says China Must Do More to Reform its Currency System”, Associated Press, 29 March 2006

“Asian Bank is developing regional currency index”, The International Herald Tribune, 28 March 2006

“Launch of Asian Currency Unit held up by Political Blickering”, The Financial Times [London], 27 March 2006

“Single Currency for Asia Decades Away: ADB”, The Press Trust of India26 March 2006

“Put Asia’s Large Savings to Work for Asia, Says ADB Vice President Liqun Jin at Mekong Development Forum in Singapore”, Asian Development Bank Press Release on 8 March 2006, Available from http://www.adb.org/Media/Articles/2006/9443-Singapore-Mekong-Development-Forum/default.asp