Frontier of East Asian Monetary Cooperation: ACU and APU

							Two Frontiers of East Asian Monetary
          Cooperation: ACU and APU
                                    TORITANI, Kazuo
      Faculty of Economics, OITA UNIVERSITY, JAPAN
I Introduction
• Two Frontiers
  ACU: Asian Currency Unit
  APU: Asian Payment Union

    Making difference between finance and money
    Finance: lending and borrowing
•   Three Functions of Money;
•   Means of Payment
•   Unit of Account
•   Store of Value
II Asian Currency Unit; its possibility and
difficulty
i. Background of ACU
Overshooting YEN/Dollar rate in the middle of 1990s
・April 1995, ￥ appreciated to ￥80
                        ↓
        Summer to Autumn 1997; Asian Crisis
                        ↓
              Summer to Autumn 1998
  The Long-Term Capital Management in bankruptcy
                        ↑
                YEN CARRY TRADE
・Crisis-hit countries→under the de facto US dollar
  fixed Exchange Rate System
                          ↓
Appreciating ＄=Appreciating Thai Baht
               =Appreciating Malaysian Ringgit
               =Appreciating Korean Won
                          ↓
                Overvalued Currency
Loosing Trade Competitiveness in the World Market
                          ↓
      Fixed Exchange Rate System or Floating
              Or Alternative Way→ACU
ii. Good Point of ACU
ACU as Basket Currency; $（60％）, EURO（20％）,
    ￥（20％）
Korean Won’s exchange rate pegging to ACU
                            ↓
$ appreciation against \ by 50%→only 30% reflected
   in calculation of ACU value
$ appreciation against \ by 50%= \ depreciation
    against $ by 33.3% (ex. \1＝$1/100→ \1＝
    $1/150)→6.66％ reflected in calculation of ACU
                            ↓
     +30% up, 6.66% down→only 23.34％ up in ACU
        If $ appreciation against \ by 10%, ・・・？
iii. If Adopting ACU all over East Asia
・Chinese government announced the renminbi
  appreciation by 2.1% on July 21st, 2005; changing
  exchange rate system from the US dollar fixed
  exchange rate system to managed floating system
  in reference with Basket Currency System.
・Malaysia did on the same day.
・Singapore has a long experience of basket
  currency system.
                           ↓
  If we, East Asia, adopt Basket Currency System,
      composed of ASEAN+3 countries’ currency;
  Is it a big step toward single currency as EURO?
iv. To Overcome Defects of ACU
a. ACU as Basket Currency is artificial currency
                           ↑
On the other, actual foreign exchange transaction is
   denominated in concrete national currency, $!
                  Can we give up $?
b. ACU survive international financial transaction?
Bipolar View ( Two Corner Solutions); independent
   monetary policy, stable exchange rate, and
   international mobility can not be compatible all at
   once.
Intermediate Exchange Rate Regime; ACU
• Bipolar View’s diagnosis and prescription of the
  crisis; misconducted policy mix; floating exchange
  rate to keep independent monetary policy
                          ↑
  Currency Speculation getting hard after moving to
  floating exchange rate
                Bipolar View is reliable?
          Think the thesis in a reversed way!
Once international capital movement can be
  regulated, we can have both stable exchange rate
  and independent monetary policy.
・Chinese Renminbi case; the US demands Beijing to
  widening the fluctuating band of renminbi.
                         • ↓
         • Isn’t it the way for the floating?
 Bipolar View; the floating leads to free
  international capital movement.
 China may be put in financial turmoil, and
  vulnerable to currency speculation as the crisis?
 China will be able to sustain itself?
 The neighboring countries can support China?
・ACU as basket currency is viable of currency
  speculation? No!
III Asian Payment Union: Ground for ACU
i. Idea of APU
APU; established in 1975, by ESCAP, The UN;
    member countries (India, Pakistan, Srilanka,
    Bangladesh, Myanmar, etc)
                          ↓
            Mutual Clearing Union Network
Central Bank opens its clearing account at the
    counterpart each other.
           Asian Monetary Union: I unit = $1
            What can we learn from APU?
ii. Offsetting Mechanism in Clearing Trade Balance
Korean International Trade of 2005
Total $2,318 million in surplus with the world
With China, $23, 267 million in surplus
With Japan, $24,376 million in deficit
Subtotal,       $1,109 million in deficit
Korea can offset its trade deficit with Japan by its
    trade surplus with China by 95.5%, without money.
Korean trade with Taiwan in surplus $2,813 million
Korean trade with ASEAN in surplus $858 million
Total Korean trade with East Asia in surplus $2,562
 million/Total gross amount of its trade with East
 Asia $51.3 billion ×100(%)≒5% →95％ Offset!
China;88%, Taiwan; 94%, ASEAN; 85%←Offset!
Japan; 62.6%, unilateral trade in surplus with East
  Asia←FTA effect in future
The weight of East Asia in international trade
  direction of each country is getting growing.
                           ↓
           Offsetting Mechanism can work!
                           ↓
       ACU must be grounded on this reality.
        Offsetting the debt with the credit→
  buying and selling foreign exchange in balance→
   the exchange rate pegging to ACU is stabilized.
iii. Financing Temporary Liquidity Shortage
       The debtor country with the regional trade
                            ↓
      Temporary Shortage of Short-Term Liquidity
                            ↑
                        Financing
      Newly Established Regional but International
                      Financial Entity
     The debtor country in the regional trade, on the
              other the creditor country in it.
         This is one of current functions of IMF.
      We can take over this function for ourselves.
iv. ACU as Unit of Account and as Store of Value
 Currency Accordance; denomination currency for
  the short-term finance must be the same with
  denomination currency for the regional trade.
                         ↓
                        ACU
                         ↑
Central Bank in the region opens its clearing
  account at the counterpart each other.
The clearing account can work as foreign
  reserve←store of value
v. How to deal with the US dollar
The US demands East Asian Currencies to
  appreciating against Dollar.→Depreciating Dollar
  against our currencies.
But as far as we continue to recycle our trade
  earnings with the US in the form of the Dollar
  denominated financial asset, the US demand can
  not be realized.
      Okay, let’s make their dream come true!
We should conduct our policy unanimously→ Selling
  Dollar, Buying Gold! →Gold price denominated in
  Dollar gets higher=Dollar devalues against Gold.
A portion of Gold must be transferred to our
   common financial entity to back our ACU
                          ↓
                 ACU backed by Gold
If Gold price denominated in Dollar gets too much
   higher, we can stop converting Dollar into Gold/
   Or, we can convert Gold in Dollar in the market.
                          ↑
                 Why can we do this?
        We have trade in surplus with the US.
   We have foreign reserves denominated in Dollar.
We can destine the fate of Dollar, only if we can co-
                operate monetary policy.
 With this Gold policy, the relative exchange rate in
              this region is not changed.
    We don’t need beggar-thy-neighbor policy!
IV Conclusion
        ACU                            APU
          ↑                             ↑
        ECU                            EPU
          ↑                             ↑
        SDR←←←Robert Triffin→→→
                          ↑
            International Clearing Union
                   John M. Keynes
Thank you for listening!