Working East Asian Security Community and Multilateral Institution Building
 
QIN Yaqing
Paper for CSCAP 6th General Conference
December 7-8, 2007
 
 
Introduction
 
East Asia has been the fastest developing region in the world in the past decade. Regional economic and functional cooperation has made great progress. There has been no big war and large-scale conflict.
 
However, traditional security threats are many. The decade has witnessed progress in regional cooperation, and at the same time a Westphilian culture still dominates. Suspicion, distrust, and even hostility prevent nations in the region from effective cooperation in the traditional security area. The nuclear and security issue on the Korean Peninsular still needs time to solve; China and Japan faces numerous problems though their relations have turned for the better; the mainland of China and Taiwan have tensions from time to time due to the repeated challenge by Chen Shuibian; and territorial disputes involve many countries in the region.
 
The existence of all these security threats coincides with a serious lack of institutional arrangements for the region. Thus, lack of reliable predictability and restraint is a common thing in East Asia. Although we seem to have sufficient wisdom to keep all the threats from escalating to a major conflict, there is no guarantee that such escalation would not occur in the future. Institutional arrangements are highly necessary if we want our region to have sustainable security and continued prosperity.
 
What is encouraging, however, is that something has happened in the region. Smart, rational, and successful exploitation of these positive developments will facilitate the establishment of institutional arrangements. I will discuss some of these developments.
 
I. The Korean Peninsular: From a Nuclear Crisis to a Lasting Peace Mechanism
 
The six-party talks on the Korean nuclear issue, after years and rounds of patient negotiations, see remarkable progress in 2007. Two important breakthroughs deserve mentioning. The first is the 2005 Joint Statement, which includes the DPRK commitment to abandon its nuclear programs and the US promise not to attack or invade DPRK. “Commitment for commitment, action for action" served as an usher for further cooperation.
 
The second breakthrough is the six round when all parties agreed to push forward the six-party talks process toward the goal of verifiable denuclearization of the Korean Peninsular in a peaceful manner. Implementation is going on.
 
Along with the progress in the Korean issue, North and South Korea have made effort to improve their relations. The leaders signed a declaration, emphasizing peace and prosperity as well as further improvement of their relations.
 
The progress offers some favorable conditions for building a multilateral mechanism for peace and security on the Korean Peninsular. First, important stakeholders are present and persistent in engaging themselves in the negotiation process; second, some important principles and norms and decision making procedures are taking shape, such as dialogue, negotiation, and peaceful settlement of disputes; third, a multilateral framework works for keeping all parties, including the conflicting ones, engaged.
 
Based upon the progress already achieved, it is possible to first set up a multilateral mechanism for lasting peace on the peninsular, with the signing of a peace agreement by the two Koreas, China, and the United States. With continued effort, this can be made to evolve into a multilateral institution for Northeast Asia, which will provide a foundation for a Northeast Asian security community, even though the road must be extremely tortuous.
 
II. ASEAN Security Community: Promise to Reaching Out
 
ASEAN has decided to establish an ASEAN security community by 2020. Several decades of cooperation in various fields among ASEAN nations, they have developed their way of community building. The degree of their economic integration is high, their cooperation is extensive, and their community identity is easier to develop and consolidate. Even thought there has been talk about the lack of ASEAN cohesiveness and there are thorny problems within ASEAN, the ASEAN Charter and the political will expressed by ASEAN leaders are encouraging. Thus it is possible that ASEAN can materialize the planned security community.
 
If ASEAN security community is going on smoothly, it will help promote an East Asian security framework, with China, Japan, and ROK gradually joining in. The present cooperation model in the economic and functional areas has developed positive principles and norms, which may be borrowed and used in security cooperation. At the same time, ASEAN-centered dialogues with other actors both within and without the region may keep the regional security cooperation process open, which should be seen as a positive rather than negative factor.
 
The key to the success of this somewhat ideal type of the regional security framework, at present, is to support the development of the ASEAN security community.
 
The past success in economic cooperation shows that the ASEAN leadership in regional institution building is crucial. Since the 2005 East Asian Summit, there have been new problems, some of which have led to the argument that ASEAN is too weak to lead the regional process. ASEAN has shown some weaknesses in internal cohesiveness and the Plus Three are three major players in the region. A changed pattern of regional leadership, however, would risk derailing the process itself, especially when we come to the most sensitive area of traditional security. Thus support of ASEAN's effort to build the ASEAN security community is imperative.
 
. APEC, ARF, and the Role of the United States:
 
East Asian regionalism is by nature and by necessity open regionalism. It cannot copy models anywhere else. For a security institutional framework, it is neither possible nor desirable to establish a close system. The Korean nuclear issue and the process of East Asian regional cooperation in the past decade have further proven this point.
 
A most desirable model of East Asian security institutional framework is the integration of ASEAN security community with a Northeast Asian security community, which has close connections with actors outside the region. As a more balanced configuration of power structure which includes major countries in and outside the region provides a favorable condition for stability, a dynamic internal process of security cooperation will help bring about a stable regional order.
 
For this overall architecture, the United States plays an important role. The United States has important interests in East Asia. Its hub-and spoke alliance system continues to exist and work, and its involvement in APEC and ARF makes the regional economic and security processes open and porous. For institutional arrangements concerning East Asia, ARF is able to play a pivot role in reaching out of the region.
 
As the rise of China coincides with the development of East Asian regionalism, some people are concerned, thinking the possibility of China's replacement of the United States in terms of influence in the region. Thus, for the United States, its present policy seems somewhat unclear: While it is not opposed to East Asian multilateralism, it is at least not actively supportive of it. Two major concerns of the United States are there: first, whether the East Asian regionalism should replace or threaten the US bilateral alliance system; second, whether this regional multilateral process would be dominated by China.
 
Source: Asian Perspective, Vol. 30, No. 3, 2006, pp. 129-148.
Author: Zhang Xiaoming (School of International Studies, Peking University)

Abstract: The rise of China is certain to have a great impact on the direction East Asian regionalism takes. In that rapidly evolving process, China will play a major role in integrating with the region. China's rise is an opportunity for East Asian community building, because China has been a responsible participant in the community-building process. On the other hand, China's growing power and influence in East Asia could also arouse fear and anxiety, especially in China's neighborhood, which could hamper the process of community building in East Asia.
 
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Political Challenges and Political Will:
Toward a Sustainable Process of Building an East Asian Community
 
QIN Yaqing
China Foreign Affairs University
Symposium "Steps Towards Building an East Asian Community"
Tokyo, September 28, 2007
 
 
I. Introduction
 
In November, 2004, the leaders of ASEAN, China, Japan, and the ROK accepted the proposal made by the East Asian Vision Group (EAVG) and agreed to take the building of an East Asian Community (EAC) as the long-term goal. This is great progress in the regional process, showing the determination of the nations to work for peace, stability, and prosperity through the joint effort to build a regional community. In 2005, the first East Asian Summit (EAS) was held in Malaysia and 16 countries were present, including ASEAN, China, Japan and South Korea, Australia, New Zealand, and India.
 
The first EAS marked a further step forward in the process of East Asian regionalism, providing an important forum for strategic dialogue. At the same time, the ASEAN+Three (APT or 10+3) process has continued to move ahead, serving as the main vehicle for East Asian regional integration and carrying out many cooperative activities in numerous functional fields. [1]
 
East Asian regionalism has been making great progress. At the same time, it is at a crossroads. On the one hand, we see strong dynamics that has been pushing forward regional cooperation and encouraging nations in this region to produce initiatives and ideas. The 1997 financial crisis, as many used to believe, would derail the East Asian regional economic development, but in fact the post-crisis dynamic has been even stronger, pushing forward the continued growth of the region. On the other hand, serious obstacles and challenges exist. In the past few years, many have been brought up, for example, the enormous diversity in the region, the low level of institutionalization, and the lack of spillover effects from economic cooperation to other fields. Disagreement also exists. Opinions have deferred both before and after the first EAS and people have debated over such questions as whether East Asia should have a geographical limit and how outside players should participate in the regional process. [2] This paper tries to diagnose the political challenges, which, if not properly responded to, would constitute hurdles to the process of the East Asian community building.
 
II. Political Challenges to East Asian Regionalism
 
There are various political challenges to the East Asia's effort to build a regional community. I have identified four, namely, differences among East Asian nations about how East Asian community should be built , less cohesiveness of ASEAN as the driving force, the competition between China and Japan as the major powers of the region, and the threats that exist in the traditional security areas. I will discuss them in turn.
 
1. Differences among East Asian nations
 
The past few years have seen some erosion of the consensus that was formed during the 1997 East Asian Financial Crisis. Differences among East Asian nations have surfaced and are reflected by the disagreement concerning various aspects of the regional community building.
 
First, the disagreement on the definition of the region. In the last two years since it was decided to hold the East Asian Summit, the debate has been going on as to how to define the region. There are mainly two different ideas. Some argue that the region has been clearly defined by the East Asian Vision Group (EAVG) as including 10+3. Others believe that it should expand to include other nations such as India, Australia, New Zealand, and more. In 2001, for example, the then Japanese Prime Minister Koizumi put forward the idea of “enlarged East Asian community," which would include Australia and New Zealand. [3]
 
The insistence on 10+3 is based on the belief that certain geographical limit should be followed to make the process effective and substantial. The advocate for expansion and inclusion of outside powers may want to establish a larger region, which might be more a political concept than a mere geographical consideration. The disagreement reflects different ideas and approaches about how East Asian regionalism should go forward. At the same time, it perhaps implies consideration on power relations in the region, for example, balancing the rising China or keeping a certain balance of power. Although the first East Asian Summit was held after all sides had agreed with the ASEAN consensus on its membership, the disagreement is only shelved rather than solved.
 
Second, the disagreement on the leading force for the regional process. East Asian regionalism has been led by ASEAN, a group of small and medium-sized nations, which started the process and set up its rules and norms. [4] Since 1997, the process has been enlarged to include China, Japan, and South Korea, and the APT mechanism was thus created. Together with it there has been the debate as to who would lead the process. Some argue that the European integration process has been successful because two major powers on the European continent, namely France and Germany, have played the crucial role and provided the leadership. The situation in East Asia differs from Europe in that it lacks effective leaders. With the involvement of the Plus Three countries, should China, or Japan, or South Korea, or the three together, play the leading role?
 
In 2005 EAS was held. The leadership debate has moved beyond the mere argument about the lack of major power leadership. Now that the two processes, APT and EAS, are going together in the region, what functions and roles should they play respectively? EAS, which includes Australia, New Zealand, and India, seems to illustrate the nature of East Asia's open regionalism. [5] APT, on the other hand, continues to work at substantial cooperation. At the 10+3 Summit and EAS, the roles of APT and EAS were defined respectively as the main vehicle for the community building and a forum for strategic dialogue. But another round of debate seems to be undergoing since then: Which will play a more important role and whether the EAS should be strengthened to provide the major platform?
 
Thus, the leadership debate has been along two tracks, one being which player or players should lead, and the other being which process, APT or EAS, should play an more important role in the regional process. The debate is far from completed.
 
Third, the disagreement on institutionalization. East Asian regionalism is characterized by its low level of institutionalization and informality, which have been said to be a special feature of the ASEAN Way. [6] In the past several decades, this informal style has helped to bring together nations in the region and to maintain the process of prosperity and progress, especially when we consider the complexity and diversity that exist almost in every aspect of life in East Asia. To some extent, without following the ASEAN Way, it would be impossible for East Asian nations to cooperate in such a successful way.
 
Along the rapid development of East Asian regionalism, particularly with the decision made by the APT leaders to take the building of an East Asian Community as a long-term goal, institutionalization has been brought up again as an important topic. On the one hand, some believe that the low level of institutionalization in East Asian regional process is more beneficial because it has worked. On the other hand, some warn that European regionalism is rule-based and East Asian regionalism should be more institutionalized. [7] When East Asian regionalism is at a lower stage, loose arrangement is more beneficial; but as it develops, it should have more formal institutions so as to provide binding effect on nations concerned. The ASEAN Secretariat has complained many times that the low level of institutionalization makes implementation of APT summits' decisions and important measures extremely difficult. The apparent disagreement is on whether a high level of institutionalization may create the democratic deficit as the Europeans have done, but the underlying worry is perhaps more about erosion of national sovereignty.
 
These disagreements show that consensus on the roadmap for building an East Asian community is yet to be reached. Sometimes, we prefer to use the European model as a term of reference, but in fact the East Asian approach is very different. Some may argue that Europe five decades ago was similar and even worse. But one thing is worth particular attention: European regionalism, supported by the United States, started after WWII, when those European nations were all allies and needed only to overcome the historical memories, while in Asia today we have both bitter historical memories and present distrust to overcome, and the United States is somewhat suspicious and hesitant. This is a fact to deal with and not something to complain about.
 
2. Less Cohesiveness of ASEAN
 
A distinctive feature of East Asian cooperation shown in the past is the ASEAN leadership. ASEAN has played the key role in setting in motion the regional process and kept it moving on. Many of the norms and rules have been formulated by following the ASEAN Way.
 
This leadership has been shaped by ASEAN's continuous efforts in strengthening its own cohesiveness and building up its capacity. Bangkok Declaration in 1967 demonstrated a strong collective will to cooperate in the post-colonial and cold-war era. In 1976, the 1stASEAN Summit adopted Treaty of Amity and Cooperation (TAC), which filled this regional “association" with substantive norms. In 1993, the ASEAN Free Trade Area was launched, signaling the initiation of its economic integration. In 1995, with Vietnam being accepted as its member, ASEAN overcame the hurdle of ideological differences and realized the dream of a “one Southeast Asia." [8] In 1997, the Asian Financial Crisis led to the formation of the APT mechanism. Since then, the concurrence of ASEAN Summit, ASEAN Plus One Summit and ASEAN Plus Three Summit in ASEAN countries has clearly indicated ASEAN's cohesiveness and leadership in regional cooperation. The year of 2004 witnessed the signing of Bali Concord II, which not only sped up ASEAN integration by building ASEAN Community with three pillars, political, economic, and socio-cultural, but also strengthened the political will of its member countries to collectively manage challenges of globalization and regionalization in a new century.
 
The ASEAN leadership has been shaped by its conscious effort in norm-construction and agenda-setting in regional cooperation. TAC, the Declarations of Conduct of Parties at South China Sea (DOC) and the ASEAN way of consensus, comfort, friendly consultation and non-interference have been accepted by big powers in the region.
 
In the last few years, however, ASEAN started to show some signs of less cohesiveness. First, it seems that there lacks a strong leadership within ASEAN itself. The old ASEAN five used to lead its development. But now some didn't fully recover from the disaster brought about by the Asian Financial Crisis and still suffer from economic difficulties; some have experienced domestic political instability or non-traditional security threats. As a result, cohesiveness has become a serious issue for ASEAN nations to consider.
 
Second, cohesiveness of ASEAN has also been weakened by their differences concerning the EAS membership and pattern. The original design of EAS was to replace APT as a long-term measure to build East Asian community. However, who would participate in EAS became a disputed issue, which in fact delayed its first meeting. Should EAS be 13, 10+3, 10+3+3, 10+6 or 10+N? It actually boils down to the key issues of leadership as well as the architect of East Asian community. Though ASEAN members believe that they should be one 10 instead of ten 1s among many, they differ in their ideas of “East Asia" and the community. Is there a geographic boundary for East Asia? What norms should the community building be based on? The differences and confusion on this issue have no doubt weakened ASEAN cohesiveness and its driving role, thus posing a challenge to East Asian community building.
 
A dynamic regional process needs a more cohesive ASEAN at the driving seat. Hopefully, the ASEAN Charter to be adopted by ASEAN Summit later this year will increase the cohesiveness of ASEAN. The Charter symbolizes a strong political will to “transform ASEAN into a stronger, more united and effective organization." It will strengthen rules and institutions, streamline organizations and decision-making procedures and empower ASEAN Secretariat. And more importantly, it will ensure more rapid and deeper integration of ASEAN community and ASEAN's driving seat in all regional processes. [9] The Charter, if well adopted and implemented, could enhance the cohesiveness of ASEAN and strengthen its leading role in East Asian community building. And a more cohesive ASEAN is in a better position to taking the driving seat of East Asian regional integration.
 
3. Competition between China and Japan
 
There is deep misperception and distrust between China and Japan. The number of Chinese people who have friendly feelings towards Japan has declined sharply since the end of 1980s; and the same thing happened in Japan.[10] The demonstrations in 2005 against Japan's revisions of history text books were the largest and first nation-wide demonstrations in China in recent years and China-Japan relations plunged to their lowest point since 1972 when the two countries established official diplomatic relationship.
 
From time to time, the Japanese right-wing forces have tired to deny war crimes and the sufferings the war caused to the Asian people, which often result in rage and hostility of the victims of that war. The disputes over East China Sea and the intense contention for “Angarsk-Daqing Line" are also signs of distrust between the two countries. The biased and sensational reports of some media and the outrage of citizens had no doubt contributed to the deepening of misperception and distrust. All these factors unfortunately fell into a vicious circle and, to a great extent, shaped the Sino-Japanese distrust and competition.
 
The structure of international relations is fundamentally a cultural or ideational structure and misperception can incur high costs. The material capabilities of a country are interpreted by others through perception and interaction. The self-reinforcing circle of misperception and distrust has led to the Japanese interpretation of China's rise as a threat. China has witnessed very rapid economic and social development since the early 1990s with annual GDP increase of about 8-10%. However, almost at the same period of time, Japan had 10-year economic recession. Last year, China became the world's 5th biggest economy. This is the first time ever since the Sino-Japanese War of 1894-1895 that China got that close to Japan in terms of material power. In international politics, the rise of a power is often regarded as a challenge and threat to the original order and the original dominant power. Therefore, Japan seems to be quite sensitive to China's military and space development.
 
Value-diplomacy is one of the four pillars of the foreign policy of Shinzo Abe's administration. Japan has engaged itself in advocating universally-recognized values in regional cooperation, forming “value alliance" with US, India and Australia, and shaping “the arc of freedom and prosperity" along the outer edge of Euroasia continent. These efforts together with its bid for a standing position of UN Security Council are part of Japan's pursuit of a “normal state" and comprehensive power. But such efforts may well be interpreted as insincere means of competition, as instrument to achieve other ends, and as big sticks to silence others. East Asia is a region with great diversity, where regional cooperation is at a very early stage and therefore fragile, where common grounds must be consolidated and expanded, and where differences should be overcome and at least shelved. Under such circumstances, the over-emphasis on a single, universal model of value system can be quite divisive.
 
The competition between the two countries is well reflected in East Asian regional processes. The ASEAN way versus “universally-recognized values" is an example in this respect. In the 1980s, the flying-geese pattern put Japan at the front of economic growth of East Asia; in the 1990s, the China-ASEAN FTA arrangement, China's earlier accession to TAC and China's positive role in shaping APT made China-ASEAN partnership more substantive and ahead of other 10+1 relations.[11] This competition could be quite benign, for it could push forward the regional process. However, due to the relations between the two countries, the competition has had a conflictual tone, which is detrimental to the regional cooperation.
 
Accounting for nearly 85 percent of East Asian economic activity, China and Japan undoubtedly are two important players in East Asia and thus their relationship is key to the building of an East Asian community. The competition originated from misperception and distrust will not only harm bilateral dialogue and cooperation, but also make it more difficult to further East Asian regional integration.
 
3. Traditional Security Issues
 
A regional community is first of all a security community. In East Asia, thanks to the efforts to carry out multilateral regionalism, there has been no major armed conflict among ASEAN member nations since 1967 and among ASEAN+3 nations since 1997. But traditional threats continue to exist and, if not well managed, could become serious problems for the region.
 
Territorial disputes. Since 1960s, territorial disputes have surfaced in South China Sea. Since 1970s, the territorial disputes over South China Sea, ranging from civilian activities and economic development in controversial areas to sporadic and minor military skirmishes, emerged increasingly as a crucial problem intimidating regional stability. 
 
Committed to easing the situation, China and ASEAN adopted the Declaration on the Conduct of Parties in the South China Sea in 2002, which was viewed as a promising sign of a peaceful resolution. However, the declaration is on a non-binding base. The follow-up DG Meeting and Joint Working Group have not worked out any substantial measures to implement the Declaration. And it turns out to have limited constraints on the parties' behavior, especially when their important national interests are involved. At a crucial time for East Asian community building, this could shed shadow to and cast uncertainties for East Asian cooperation.
 
East China Sea disputes involve two interrelated issues between China and Japan—the East China Sea continental shelf and Diaoyu Islands. After the United Nations Convention on the Law of the Sea came into force in 1994, divergence between China and Japan concerning the continental shelf of the East China Sea became sharper. China stands for the equitable principle, while Japan prefers the equidistant “median line." In recent years, both China and Japan have started oil and gas explorations in the East China Sea area. Although several rounds of consultations have been held on the East China Sea oil exploitation, joint development in the area is still an unsolved problem.
 
Taiwan StraitChinese sovereignty over Taiwan is China's core national interest. Nobody across the Taiwan Strait could afford to see “Taiwan's independence." However, since Chen Shuibian became the leader of the island in 2000, he has initiated a successive provocative measures, including the remarks on “Taiwan independence," the attempt to hold a referendum and formulate a “new constitution," and the decision to cease the operation of the National Unification Council and the application of the National Unification Guidelines, to test the tolerance of mainland China and attitudes of key countries in the world. Recently, the most blatant provocative measure is the proposed referendum on and the application for UN membership in the name of Taiwan, which is viewed as a direct step intended to change the status quo across the Strait and causes a great disturbance in the region. 
 
China has demonstrated repeatedly its strong political will to safeguard its sovereignty and national integrity. Any action leading to a separate Taiwan will not be tolerated and create problems for the stability of the region.
 
Nuclear crisis of the Korean Peninsular. Since the end of the Cold War, the nuclear problem on the Korean Peninsular has become one of the most serious challenges to regional security of Northeast Asia. If the Democratic People's Republic of Korea (DPRK) should have nuclear weapons, it would (1) break down the regional nuclear balance and probably lead to a nuclear arms race in East Asia; (2) set a big obstacle to the unification process of the Korean Peninsula; (3) become a potential hot spot of conflict. DPRK nuclear issue actually results from the hostility and confrontation between DPRK and the United States. 
 
China has played an important role in initiating and keeping the six-party talks on. Up to now, the negotiations of the six-party talks have made good progress, which reflects more consensuses and more confidence among the parties involved. And now it has entered the phase of “Action for Action" and DPRK and the United States are negotiating for specific actions. However, there is still a long way to go for the final solution of this problem. And how to develop a more institutionalized mechanism so as to build everlasting security and stability on the Korea Peninsula is an even more complicated issue. Yet it is of critical importance to the building of an East Asia of peace, prosperity and progress.
 
III. Political Will for a Sustainable Regional Process
 
East Asian regionalism is at the initial stage. It is still quite weak and fragile. Considering the diversity in this region, it is natural to have disagreements and differences. We must admit this fact. Moreover, it is impossible to change it overnight. How to maintain the momentum of the regional cooperation and intensify the efforts for community building despite these differences is crucial at the present. The key is political will on the part of all East Nations who are committed to an East Asian community. We must pool up at least sufficient political will to maintain the momentum of regional cooperation and integration. This should be reflected in the following aspects.
 
First, there must be sufficient political will to maintain the regional cooperation process. Since East Asia does not have the strong legalistic foundation as Europe and does not have a clear power structure as North America, East Asian multilateral regionalism is primarily a process-oriented one: More often than not, keeping the process going is the most important work. We must remember that the process itself is of great significance, for the process of building an East Asian Community is valuable for confidence building and suspicion reduction, for norm making and learning, and for expansion of common interests and convergence of expectations. Only by maintaining the process at this initial stage can we have the hope to achieve more tangible results in the future.
 
The key argument here is clearly that the process matters. When we say that the process matters, we do not merely mean that the process is important because the rules and norms it produces matter, but that much of the time the process itself is the focus. Once nations are in the process, they are integrating and being integrated. For East Asia, where diversity is so conspicuous, the regional process itself is often the end as well as the means. The process-focused regional multilateralism in East Asia, despite its multilayered and even overlapping mechanisms, helps maintain regional stability and promote economic cooperation through extension of norms and socialization of major powers. It is the process that has woven a regional web entangling all concerned as stakeholders. This may be called soft institutionalism, which pays great attention to process maintenance and trust building thereof. For the purpose of process maintenance, it is important that nations in the region identify our common interests and expand our common ground rather than take divisive measures; it is important to help ASEAN to enhance its cohesiveness and realize its goal of an ASEAN community so that it can play the important role of being at the driving seat.
 
Second, there must be sufficient political will, especially on the part of major powers to work together, to settle disputes through consultation and dialogue. In this respect, major players' self -restraint is indispensable. The agreement that ASEAN should take the leading role and sit in the driving seat is not mere rhetoric. Neither China nor Japan, for example, can take the lead, for it could start a malign spiral of competition and increase the level of suspicion and distrust. Their self-restraint and support for the leading role of ASEAN is a practical measure to hold the regional process together. Community building, by definition, rejects the hard use of hard power, while it does need the clever and smart use of power and influence to move it forward.
 
This means that we should make tenacious efforts to develop good relations between China and Japan. In this respect, relations between China and Japan are crucially important. In the past few years, voices at various conferences in our region have expressed worries about the relations between the two countries and hopes that China and Japan should improve relations. It is a general belief that tension and hostility between the two countries hinders the regional cooperation. The visit of the former Japanese Prime Minister Abe to China last October and the joint statement by the leaders of the two countries are good signs, and the visit of the Chinese Premier and other top leaders to Japan have made further improvement, but the relations are still very fragile. Malign competition between China and Japan for regional leadership could destroy East Asian regionalism.
 
In addition, the political will conducive to community building means that integrating rather than containing or balancing should be the way to a community, especially major powers like China and Japan. Very often, balancing and even containing would come to the mind. Especially when China is developing fast, various ideas of balancing have come out and policy is sometimes made based on such ideas. But balancing China, or India in a similar sense, is highly risky. China is not the Cold War Soviet Union and is hard to be defined as an enemy. It is China's own will to join the process and it is the change of identity on the part of China that serves as an important variable that has made the region more stable and prosperous than before. China's rapid development has provided more opportunities for the nations in the region. Australia, for example, hopes to join the regional process for the gain it can make from the strong economic dynamic rather than for balancing China. Integrating is a much more preferred means to build a community, as the expansion of ASEAN to include Vietnam and Laos has shown. Cold-war strategic thinking of balancing and counter-balancing would fail East Asian regionalism and push the region back to a Cold War scenario, something nobody would like to see.
 
Third, there must be sufficient political will to commit ourselves to negotiation and dialogue for solving existing problems and disputes. Territorial disputes, for example, are highly sensitive issues and have complicated domestic backgrounds. Other traditional security issues, such as nuclear crisis and non-proliferation, have shown similar complexity. It is impossible to solve such issues overnight. To avoid escalation and worsening of the regional situation, it is a must that all parties concerned commit themselves to peaceful settlement and to continued efforts to negotiate. In due time, institutionalized mechanisms should be established to maintain stability and reduce hostility.
 
IV. Conclusion
 
East Asia is a dynamic region and cooperation among nations has been fruitful. East Asian regionalism, when the building of a regional community has been accepted as our long-term goal, has now comes to a crossroads. The tension between the dynamic to move forward towards integration and the complexity of issues has made the political will of nations a crucial factor for the community building.
 
The recent improvement of Sino-Japanese relations shows what an important role political will can play in bilateral relations. At the same time, the disagreement on the definition of the region, the low level of institutionalization, and the sluggish spillover effect—all indicates that the political will is not up to the expectation and falls short of the practical need in East Asia.
 
Just a few years ago, people had a lot of doubt about an East Asian community. When the EAVG put forward the idea, it was even taken as a rosy dream. Today, it has been a very much accepted term used on various occasions and a common goal to work for. This is why we should be optimistic about our region's future. At the same time, we need to understand that East Asian regionalism is weak and fragile, that the process is of ultimate importance at this stage of regional cooperation, and that great care should be taken to make the region progress move towards a more peaceful and more prosperous East Asia.

See the two declarations adopted at the First East Asian Summit, http://news.sina.com.cn/w/2005-12-14/22427708923s.shtml.
[2] Yeo Lay Hwee, “The Nature and Future of East Asian Regionalism," in Zhang Yunling, ed. Emerging East Asian Regionalism: Trend and Response, Beijing: World Affairs Press, 2005, pp. 15-33.
[3] Qin Huasun, Wang Shunzhu, and Gu Yuanyang, eds., Roadmap for Asian Regional Cooperation, Beijing: Shishi Press, 2006, p. 49.
[4] Archaya, Constructing a Security Community in Southeast Asi, London and New York: Routledge, 2001.
[5] The conditions are: 1) join the Treaty of Amity and Cooperation; 2) agree to join the Treaty of Amity and Cooperation; and 3) have substantial relations with ASEAN.
[6] Archaya, Constructing a Security Community in Southeast Asia.
[7] Qin Hausun, Wang Shunzhu, and Gu Yuanyang, eds. Roadmap for Asian Regional Cooperation, pp. 54-55.
[8] Jusuf Wanandi: “ASEAN Future Challenges and the Importance of an ASEAN Charter," ASIEN 100 (Juli 2006), S. 85-87.
[9] Tommy Koh, Walter Woon, Andrew Tan, and Chan Sze-Wei, “Charter Makes ASEAN Stronger, more United and Effective," The Strait Times, 8 August 2007.
[10] Lu Wen: “The Current Situation of Sino-Japanese Relations and the Role of Media," Journal of Japan Studies, No.1, 2006. pp.17-22.
[11] Interview with young diplomats from ASEAN countries, Beijing, July 25, 2007.
 
Entering a New Phase of Financial Cooperation in East Asia
 
Tadahiro Asami
 
 
I. Introduction
 
In East Asia, the governments of ASEAN+3 (China, Japan and Korea) have been promoting regional cooperation in various fields since the Asian financial crisis of 1997-98. Substantial results have been brought about in financial cooperation, together with developments in intra-regional trade and investment. The guiding principle of financial cooperation in East Asia were stated in the declaration by the ASEAN+3 leaders at the summit meeting held in Manila in 1999[i].

At the 9th ASEAN+3 summit meeting held on December 12, 2005, the leaders declared that they would prepare a second declaration at the tenth anniversary of ASEAN+3 in 2007, in order to “consolidate existing cooperation and to set forth the future direction for the cooperation and   East Asia community building". If the regional financial cooperation achieved after the Asian crisis based on the 1999 declaration is named phase 1, we will be entering phase 2 under the second declaration of 2007.

Crisis prevention will be an important element of financial cooperation under phase 2, in addition to the regional arrangements for financial crises. Furthermore, it is necessary to establish a system that will stabilize the exchange rates and monetary systems in the region, in order to attain sustainable economic growth. Two things are needed to be able to carry out these tasks across the region. First, monetary authorities in the region should establish closer dialogue, intensify the exchange of information, as well as coordinate exchange rate policy. and monetary policy among themselves. Second, East Asia should promote regional cooperation, in the context of a closer and more cooperative relationship with the United States and global institutions such as the IMF.

This paper discusses the future direction of phase 2 from a medium to long-term perspective, focusing on how to realize exchange rate and monetary stability in the region, consolidating achievements made up to now and referring to lessons learned from the experience of the European Union.
 
II.  Achievement of ASEAN+3 – the First Phase
 
The first summit meeting of ASEAN+3 was held in Kuala Lumpur in December 1997. At that time, the financial crisis, which had started in Thailand in July of the same year, was spreading to other countries in the region and forcing numerous banks and corporations into bankruptcy. The leaders in the region recognized the importance of cooperating with each other in order to be able to cope with contagion of financial crises that depressed economies, even those economies that were considered sound in their macro-economic management. Since then, the summit meeting of the ASEAN+3 has been held every year without interruption and has become the most important political event to promote regional cooperation in East Asia. More than 40 forums which meet on a regular basis have reportedly been established under the framework of ASEAN+3.

When the ASEAN+3 summit meeting was held in December 2005, the East Asian Summit, consisting of ASEAN+3 as well as Australia, India and New Zealand was held simultaneously for the first time, creating dual layers for regional cooperation. The dual layered mechanism may encourage ASEAN+3 to become more flexible in terms of its members in the future, depending on the target for cooperation.

While the governments in the region have been working to reform the domestic financial and monetary system after the financial crisis, they have also promoted financial cooperation in East Asia. The following is a summary of major achievements together with their potential for future regional cooperation:

1. Chiang Mai Initiative (CMI)
 
Based on the agreement reached at the Finance Ministers' meeting held in May 2000 in Chiang Mai, a network of 16 bilateral swap agreements, reaching a total amount of US$ 75 billion, has been completed by May 2006. The CMI is designed to support countries facing short-term liquidity difficulties in the region, supplementing the global function of the IMF. A strengthening of the functions of the CMI has been proposed at the Finance Ministers' meeting in May this year including, for instance, exploration of ways to achieve multilateralisation of its operations[ii]. The CMI has the potential of expanding its functions to help maintain a stable exchange rate system, since it can extend a short-term facility to a country that needs to support its currency.
 
2. Economic Review and Policy Dialogue (ERPD)
 
At the ASEAN+3 Finance Ministers' meeting held in 2000, the ERPD was introduced as a means to conduct economic surveillance in the region. The major focus of the ERPD is on issues related to risk management, monitoring capital flows, strengthening the banking system through policy dialogue, as well as coordination of and collaboration on financial, monetary and fiscal issues. In May 2005, it was decided that the economic surveillance carried out through the ERPD would be integrated into the CMI framework to develop effective surveillance capabilities. The ERPD has not made much progress until now, probably due to differences in political systems, impediments like the so-called non-interference policy and reluctance in disclosing sensitive economic data. If the bilateral CMI arrangement is multilateralised and if CMI is provided with the proper authority to carry out economic surveillance, the ERPD will become more effective. An efficient surveillance mechanism is a prerequisite for economic cooperation.
 
3. Asian Bond Market Initiative (ABMI)
 
Before the financial crisis, East Asian bond markets were generally underdeveloped and were unable to provide industries with long-term funds denominated in the domestic currency. Efforts have been made to develop an efficient bond market which can function as a financial intermediary, in order to mobilize the existing ample savings to the industries. As a result, the size of the local currency bond markets in the region has dramatically increased since 1997 and local currency denominated cross-border bond issues have been launched in several markets in the region.
 
4. Asian Bond Fund (ABF)
 
Two Asian Bond Funds (ABF1 and 2) were created by the Executives' Meeting of East Asia-Pacific Central Banks (EMEAP)[iii]. ABF1 amounting to US$1 billion was created in 2003 to invest in US dollar-denominated sovereign or quasi-sovereign bonds. ABF2 amounting to US$2 billion was created in 2005 to invest in local-currency denominated sovereign or quasi-sovereign bonds of eight emerging market economies, to promote the development of regional bond markets[iv]. ABF2 introduced market practices like disclosing a benchmark index, and is expected to contribute to the development of a local currency-denominated bond market as a non-resident investment fund.
 
III. Stability of Regional Currencies
 
Inter-dependence among regional economies has increased in recent years. Intra-regional trade has reached 51 percent of total trade in 2004 from 48.7 percent in 2000 and it is almost comparable with the EU, surpassing that of NAFTA. The region is now considered to be one of the economically most closely linked areas in the world. Furthermore, undergoing FTA negotiations, particularly those between ASEAN and each of China, Japan and Korea, are expected to be completed by the beginning of the 2010s. The eventual formation of a network of FTAs in East Asia will further enhance economic inter-dependence. In view of this prospect, the general consensus will undoubtedly be that it is dispensable for the region to have stable exchange rates, monetary and financial markets in order to maintain stable economic growth. Therefore, the most important challenge facing financial cooperation in phase 2 will be, how to stabilize exchange rates and monetary and financial markets in East Asia.

Linkages between currencies in the region have also steadily been deepening. Many of the currencies in the region were linked to the US dollar before the Asian financial crisis. Although linkage with the US dollar is still strong, the weight of dollar linkage has been reduced after the crisis. For instance, the Korean won is now more closely linked to the Japanese yen. The Chinese renminbi (RMB) and the Malaysian ringgit were de-pegged from the US dollar in July 2005, and moved to a managed float with reference to a currency basket. Today, only the Hong Kong dollar maintains a hard peg (currency board system) to the US dollar. Since the currencies in the region as a whole have softened their linkage to the US dollar, the policy target of the increasingly inter-dependent regional economies is to stabilize the exchange rate among the currencies and monetary systems in the region.
 
IV. Currency Basket System
 
In recent years, researchers have advocated that a common currency basket system provides a useful means to stabilize exchange rates in a region,   illustrating their point with various types of currency baskets and their policy implications. Judging by the EU's experiences, it is considered more suitable and efficient to adopt a currency basket composed of regional currencies in East Asia, where inter-dependence of the region's economies is expected to reach the level of the EU in the future, than a basket composed of outside currencies such as the US dollar and the euro. In order to ensure confidence in the basket, the currencies in East Asia that would compose it need to meet certain conditions, which include sound macro-economic indicators such as inflation, fiscal balance and government debt, maintaining currency convertibility, and an open and liquid money market (such currency will hereafter be called “core currency"). Let us assume that a common currency basket system composed of such core currencies is named the “Asian Monetary Unit" (AMU).

Once the AMU is created as a common currency basket in the region and an Asian Monetary System, a system similar to the European Monetary System (EMS), is in place, coordination of exchange rates and monetary policy will be strengthened. As a result, the exchange rates of regional currencies will become more stable, and currencies in East Asia as a whole will float against the US dollar and the euro.

The AMU so created will function as an indicator of exchange rates, a basis for the deviation indicator and as a currency unit to be used for settlement between governments. Adoption of a common currency will also have the effect of stabilizing prices, trade balances and flows of capital. The path to creating an AMU will be a long and difficult process, but a most challenging one, which will begin by gaining a broad understanding on a common currency basket system and which will ultimately lead to the ratification of an AMU and AMS by all the governments in the region. This long process may have already started. The decision taken by the governments of China and Malaysia in July 2005, to adopt a managed floating system with reference to a currency basket and thereby departing from the dollar peg system, suggests the future direction towards a kind of common currency basket system.

There are currently only three currencies in the region that meet the above mentioned conditions: the Japanese yen, the Singapore dollar and the Hong Kong dollar. If an unstable currency is included in the AMU, the stability of the AMU could be impaired. On the other hand, when the number of core currencies included in the AMU increases, the unit will gain more credibility and thus have a positive impact on the stability of prices, trade balances and capital flows in the region. Therefore, each of the governments in the region should exert efforts to reform currency and financial markets to enable becoming a core currency. Those currencies not included in the basket will be linked to the currencies in the basket.

Three points need to be considered from the region's viewpoint, if the AMU is to be introduced in the future. First, in order to stabilize exchange rates, it is a prerequisite to maintain policy coordination among the governments in the region. The ERPD agreed to in phase 1 needs to be promoted. While the importance of surveillance has been well understood in East Asia, satisfactory results have not been achieved due to some political issues which need to be addressed with strong political leadership. Second, monetary authorities in the region need to adopt proper policies on currencies while reforming monetary and financial markets. This process is a difficult and time-consuming one in light of the diversified development stages of the East Asian economies. Therefore, it should be carried out on a region-wide cooperation basis where peer pressure works and helps the progress.  Third, since economic development in the East Asian region is diversified, a regional mechanism to support this process should be created. One possibility is to create a permanent secretariat within the ASEAN+3, while another possibility is to include such a function in the CMI.

In East Asia, there are different political systems and diversified levels of economic development, making it somewhat different from the EU. East Asia lacks a security arrangement, distinguishing it from the EU where a Franco-German agreement on the peace treaty supported a single market concept from the beginning. It might be more realistic to aim at creating a common currency basket system rather than a single currency, allowing countries to preserve a certain degree of sovereignty. Although East Asia is structurally different in many respects from the EU, there are many lessons which can be learnt from its history, in particular, from its experience with units of account and a currency basket system.
 
V. Capital Account Liberalization and Currency Convertibility: the European case
 
It is not easy to generalize about sequencing the liberalization process of the external transactions of a country, since measures can differ greatly from one country to another, depending upon the stage of economic development as well as government policies. However, liberalization usually begins with current account transactions, i.e. trade and trade related financial transactions. Liberalization of financial and monetary transactions usually starts with the liberalization of domestic transactions and later moving to external transactions. The process then moves from the current account to the capital account, which usually starts with inward foreign direct investment (FDI) involving transfer of industries and technology. From FDI, the liberalization process will move gradually on to securities and long-term capital transactions while finally arriving at the liberalization of short-term capital.

When a country moves from current account to capital account liberalization, its economy will be more deeply integrated into the global economy. As a result, the economy will be able to reap the benefits, but at the same time it will be exposed to external risks. Therefore, liberalization of the capital account should be carefully carried out, recognizing its objectives and risks. The IMF, before the Asian currency crisis, recommended unconditional capital account liberalization (this is part of the so-called Washington Consensus). After the crisis, however, the IMF became more sympathetic to market-based controls on short-term capital flows. Accession to organizations as the OECD and WTO often comes with a promise to open up financial and capital markets.

Many European countries established convertibility of their currencies by 1958 and accepted article 8 of the IMF charter at the beginning of the 1960s. At that time, convertibility of a currency was permitted for current account transactions. Although convertibility was restricted with regard to capital account transactions, the foreign exchange spot market was directly or indirectly permitted to non-residents. It was due to this fact that the ECU, referred to below, could be broken down by currency component and reconstructed easily by executing exchange transactions for each of the component currencies in the market.

The European Commission completed liberalization of capital account transactions in 1990, more than 30 years after the Treaty of Rome became effective in 1958, incorporating articles obligating members to liberalize capital account transactions. The European Commission carried out liberalization in accordance with the following classification of capital transactions into three categories.

1. capital operations such as commercial credit, direct investments or various personal capital movements which are directly linked to the freedom of trade in goods and services, the free movement of persons and the freedom of establishment                                       1960
2. operations in financial market securities (bonds, shares and other securities)                                             1986
3. operations involving financial credits and operations related to money market instruments                                    1988
(full liberalization of internal capital movement)        1990

It should be noted that safeguard clauses were included in the Treaty of Rome to protect member states against sudden balance of payments difficulties and disturbances in the capital markets caused by capital movements.

The official ECU was created in 1979, twenty years after European countries accepted article 8 of the IMF charter. Initially, the official ECU was composed of 9 convertible currencies, a number which later increased to 12. In Europe, various types of “Unit of Account" consisting of convertible currencies had developed well before the official ECU was created, which were used for capital market transactions such as bond issues. Some types of investors found Unit of Account-denominated instruments attractive since the risk of the Unit was diversified over several convertible currencies.

Once the official ECU was created, transactions denominated in ECU with an identical composition of currencies became popular in the capital market for private transactions (the private ECU), as banks and investors alike were used to undertaking transactions in some kind of unit of account, as for example the European Unit of Account (EUA). The essential factors that played a decisive role in the development of the private ECU market were:

a. The component currencies of the ECU had to be convertible. This was a fundamental requirement because the private ECU needed to be freely traded in the foreign exchange market.
b. The private ECU had to be liquid. As the ECU market grew, an ECU clearing and settlement system was established.
c. Unlike a national currency which is supported by a nation state, the private ECU was not the legal tender of a country. Therefore, the private ECU had to secure market confidence, which was supported by the following:
  • An uninterrupted availability of the official ECU. The European Commission announced the ECU exchange rate every day.
  • Each currency composing the private ECU maintained a stable exchange rate. When exchange rate stability was seriously damaged due to a loss of confidence as, for instance, during the European currency crisis of 1992-93, the ECU market receded.
  • The European Commission and member states supported the development of the private ECU. For instance, the European Commission encouraged EC institutions to use the ECU.
VI. Liberalization of the Capital Account in East Asia and Convertibility of Currencies
 
Except for Japan, it is relatively recent that major East Asian countries accepted article 8 of the IMF charter, establishing current account convertibility. It was not until 1988 that Korea accepted the article, 1990 for Thailand and as recent as 1996 for China. In countries like Korea and Thailand, foreign capital started to flow in even before they decided to liberalize the current accounts. In the early 1990s, a huge amount of short-term capital and FDI flowed into Korea and Thailand. In the case of Indonesia, the liberalization of capital flows was permitted already in the 1980s. Therefore, in East Asia, the sequence of liberalization of capital movements was quite unique, not necessarily following the conventional path.

While China imposed very strict controls on foreign exchange transactions, countries like Malaysia, Thailand and Indonesia liberalized the use of their currencies in the offshore market, which were subsequently vulnerable to currency attacks. The volatile movements of short-term capital, including speculative funds, attacked fragile currencies and financial markets resulting in the financial crisis. Based on these experiences, Malaysia, Thailand and Indonesia adopted a policy of so-called “non-internationalization of currency", which they imposed on commercial banks. This restricted loans in domestic currency as well as their dealings with non-resident clients. Singapore abolished its foreign exchange controls, but maintained restrictions on lending to non-residents in domestic currency. The use of their own currencies for loans and foreign exchange transactions with non-residents are restricted as follows.

Loans             Foreign Exchange
China      prohibited          prohibited
Malaysia   prohibited          only for hedge purposes
Thailand   up to BHT50mn     underlying (?) transaction basis
Indonesia   prohibited          for hedge purposes only
Korea      up to Won 1 bn      technically difficult

Notes

Thailand: The outstanding balance of a settlement account may not exceed BHTs 300 million.

Korea: Effective as of January 2006, restrictions on lending to non-residents have been liberalized, subject to prior notice to the Bank of Korea.

Since the so-called non-internationalization policy is considered to be temporary in nature, it may be relaxed gradually. The key for determining the timing of relaxation will depend on how the countries make progress with the liberalization of the domestic market, in particular, the short-term money market. If these countries recognize the importance of a currency basket system and adopt necessary policy measures to make their currencies a core currency for the basket, the non-internationalization policy may be withdrawn. In this respect it should be noted that the establishment of partial convertibility may be sufficient to become eligible for the core currency status in a currency basket, as the European experience shows.
 
VII. Capital Account Liberalization in China
 
In 1996, China accepted article 8 of the IMF charter and liberalized current account transactions. In 2001, China joined the WTO and is now expected to complete its liberalization of domestic financial markets by the end of 2006, in accordance with the agreement with the WTO. In the meantime, China's current account surplus has been increasing over the years and foreign exchange reserves have reached US$853.7 billion in February 2006 which makes it the largest amount in the world, even exceeding that of Japan[v]. China ended the US dollar peg in July 2005 and adopted a managed floating system. The central rate of the RMB to the US dollar was revalued by 2 percent to US$1=RMB8.11. Since then, the RMB has appreciated to around US$1=RMB8.

With regard to the capital account liberalization, the Chinese government has been gradually relaxing inward foreign direct investment (FDI) since the end of the 1970s and is now one of the largest FDI recipient countries in the world. Outward FDI has been relaxed gradually in recent years in order to encourage Chinese companies to invest overseas. With regard to inward securities investment, a scheme called Qualified Foreign Institutional Investor (QFII) was introduced in December 2002, permitting qualified foreign institutional investors to invest in equity and bonds in China. Also, three years after QFII was introduced, a scheme called Qualified Domestic Institutional Investors (QDII) was introduced on April 17th of this year, permitting qualified domestic institutional investors to invest in securities in overseas capital markets. From May 2006, Chinese individuals are allowed purchase up to US$20000 annually for overseas travel.

These liberalization measures, though still at an early stage, permit both inward and outward capital flows, thus paving the way towards more full-fledged capital account liberalization in the future. It is important that liberalization of capital accounts will allow Chinese monetary authorities to conduct a freer and more independent monetary policy. Chinese authorities will continue to take cautious but steady steps in the liberalization process of capital accounts, paying due attention to avoid the risk of exposure of the relatively immature domestic financial and monetary markets.

The question is when will the authorities decide to adopt more flexible exchange rates and convertibility of the RMB? Leaving the exchange rate question aside, the timing of currency convertibility is in China's own interest since convertibility of the RMB will allow China's economy to be integrated more easily into the global economy, thus strengthening its financial system. From the viewpoint of a regional currency system, convertibility of the RMB will be an important step towards regional currency integration.

In March this year, India's Prime Minister Manmohan Singh proposed to establish full convertibility of the rupee which has been a long-standing issue in India since 1997. The Reserve Bank of India is expected to submit a recommendation on capital account convertibility by the end of July this year, as requested by the prime minister. If India goes ahead with this proposal, it will only be carried out cautiously and gradually with adequate safeguards in place to avoid vulnerability to capital flight. The decision of India will certainly affect China's policy on the convertibility of the RMB.

The decision on the sequencing and speed of currency convertibility is at the discretion of the authorities in a country. Convertibility of the RMB, if carried out, will at the initial stage only be permitted for specific types of capital transaction, and then gradually expanded to other types of transaction. Partial convertibility may make a currency eligible as core currency for the common currency basket, if the money market is sufficiently liquid as has been seen in the ECU's history. If such measures are taken and the Chinese authorities decide to establish convertibility, it would be a very important step forward to the establishment of a currency and monetary system in East Asia.

Japan carried out capital account liberalization in tandem with the reform of the domestic money market and nearly completed its capital account liberalization by the middle of the 1980s. It took 20 years for Japan after it accepted article 8 of the IMF charter. If Japan's case is simply applied to China, in 2016 it will be 20 years after China has accepted article 8 of the IMF charter. Japan's case may not be applicable to China, but, if China carries out capital account liberalization in tandem with reforms of the banking and monetary system, it may not be so off the mark to believe that China will complete nearly full convertibility of the RMB sometime in the 2010s, considering the substantial progress which has been made for capital account liberalization and its future prospect. Convertibility of the RMB will play a critical role in realizing a currency basket system in the region. It is expected, therefore, that Chinese authorities will soon indicate a long-term perspective on capital account liberalization and convertibility of the RMB.
 
VIII. Relations with the global institution and the United States
 
Relations between ASEAN+3 and global institutions, particularly the IMF, are important. It is essential to have a close working relationship with the IMF concerning surveillance. With regard to the disbursement of funds under the CMI bilateral swap agreements, 20% may be disbursed freely, but the remaining 80% is subject to the IMF package between a debtor government and the IMF. While the CMI plays a supplementary role to the global function of the IMF, detailed arrangements on their roles and how they are to coordinate have not been made yet.

At the spring meeting of the International Monetary Finance Committee, Mr. Rato, Managing Director of the IMF, proposed the IMF should carry out multilateral surveillance of global imbalances, as well as undertake a review of the IMF quota system. For this he would present detailed proposals at the annual meeting in autumn this year. Multilateral surveillance and quota issues are important for many of the East Asian countries. The relationship between regional financial arrangements and global institutions will become an increasingly important focal point in the future.

The United States maintains very close ties with East Asia and it is the most important partner in trade and investment for most East Asian economies. In socio-cultural and security areas, the United States is considered to be almost a part of Asia. It appears that the United States is uncomfortable with East Asia's regionalism that has been proceeding without its participation. Therefore, a proper forum similar to the Asia-Europe Meeting (ASEM) should be established to maintain close dialogue with the United States.
 
IX. Conclusion
 
Regional financial cooperation in East Asia will enter into phase 2, on the basis of regional cooperation achieved in phase 1. It is essential to make meaningful progress in economic surveillance and policy coordination, where peer pressure among members will be an important tool. In order to do so, new guiding principles for phase 2 need to be established based upon common values and objectives for regional cooperation among member countries. In order for ASEAN+3 to be successful in integrating its financial systems, it is indispensable to share a common understanding on East Asian regionalism.

The idea of creating a common currency basket to achieve a stable currency system will provide members in the region with an ideal opportunity to coordinate policies among members. It will be time consuming and painstaking, but also a most challenging process to reach a consensus. It is a very important step forward to understand such a proposal and to prepare the policy measures necessary for capital account liberalization and currency convertibility.
 

[i] “In monetary and financial cooperation, they agreed to strengthen policy dialogue, coordination and collaboration on the financial, monetary and fiscal issues of common interest, focusing initially on issues related to macroeconomic risk management, enhancing corporate governance, monitoring regional capital flows, strengthening banking and financial systems, reforming international financial architecture, and enhancing self-help and support mechanism in East Asia through the ASEAN+3 Framework, including the on-going dialogue and economic cooperation mechanism of the ASEAN+3 finance and central bank leaders and officials."

[ii] Joint message, the 6th Trilateral(China, Japan and Korea) Finance Ministers' meeting May 4,2006

[iii] The Executives' Meeting of East Asia-Pacific Central Banks, created in 1991 by 11 central banks in East Asia and Oceania.

[iv] The eight countries are Thailand, Malaysia, Indonesia, The Philippines, Singapore, China, Hong Kong and Korea.

[v] Japan's foreign reserves were US $850.58 billion.

Network of East Asian Think-Tanks

The Network of East Asian Think-tanks

     
Officially recognized at the “10+3" summit meeting, Network of East Asian Think-tanks (NEAT) is a mechanism for research and academic exchange, and a platform for the second-track diplomacy in the regional cooperation among “10+3" countries in East Asia. It aims at integrating the research resources in East Asia, promoting the academic exchanges and providing intellectual support for East Asian cooperation. To be more specific, by establishing a network among East Asian think-tanks, governments and enterprises and promoting the interaction of these three circles, it intends to study the key issues related to East Asian cooperation, work out strategic ideas and concrete policy suggestions for the regional integration and submit research reports to the “10+3" summit meeting.
 
In 2002, East Asian Studies Group (EASG), the second-track in the mechanism of East Asian cooperation, suggested 17 short-term measures to be taken for closer cooperation among East Asian nations, among which was establishing “Network of East Asian Think-tanks" (NEAT) within the framework of “10+3" regional cooperation. The suggestion was adopted at the informal meeting of “10+3"leaders held in Phnom PenhCambodia in September 2002.
 
The activities of NEAT fall into the following categories: 1) Hold annual conferences of NEAT members to promote exchanges among East Asian think tanks and submit an annual work report to the informal meeting of “10+3" leaders on the basis of the research of the key issues in East Asian integration process; 2) Set up a website of NEAT, bridging the governments with the academic circles, promoting the academic exchanges among scholars about East Asia, and educating the masses in the region; 3) Hold irregular international seminars on East Asian cooperation so as to facilitate the theoretic research on the integration and community building of East Asia and help to shape the theoretic framework, strategies and specific policies conducive to the regional cooperation in East Asia. 4) Cooperate in the research of the key issues in regional cooperation and figure out the solutions.
 
The founding as well as the first annual conference of NEAT was held in Beijing from September 29 to 30, 2003. There were delegates from the think tanks of all the member states at the conference. The three topics discussed were “Towards East Asian Cooperation", Important Steps Leading to East Asian Cooperation" and “Key Areas in East Asia Cooperation". The conference report was not only published, but also distributed at the “10+3" leaders meeting in 2003.