Northeast Asian countries bolster financial ties

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Northeast Asian countries bolster financial ties


Finance Minister Bahk Jae-wan, second from left, and Bank of Korea Governor Kim Choong-soo, second from right, attend an international summit at the Diamond Hotel in Manila yesterday. Provided by Bank of Korea

MANILA - Korea, China and Japan have agreed to step up their financial cooperation by looking into purchasing more of each others’ government bonds.

The finance ministers and central governors of the three countries sat down for negotiations during the 45th annual Asian Development Bank meeting that runs for four days through tomorrow in the Philippine capital.

Central bank governors from around the world joined the four-day meeting this year for the first time.

In a joint statement, the three sets of finance ministers and central bank governors agreed that uncertainties in the global economy continue to linger and that there are potential downward risks. They also committed to further strengthen fiscal cooperation in expanding purchases of each other’s treasury bonds.

China has the world’s largest foreign reserve pool of $3.3 trillion. Japan trails with $1.2 trillion and Korea has $316 billion.

Policymakers of the three countries agreed to create a framework for government bond investments and use it to share information, which can help stabilize a country’s financial market in the event of a massive exodus of foreign capital.

The details of the framework are expected to be ironed out later.

“The fact that Japan and China are showing interest in Korea’s government bonds reflects how the country’s economy is considered to be more attractive,” said Bank of Korea official Hong Seung-je. “If they viewed them as junk bonds from an emerging market, would they really consider such an investment?”

The Korean central bank officials stressed that Japan has traditionally prioritized the credibility of a country when gobbling up its debt.

“With emerging markets surfacing as relatively safe investment havens, and in the face of few alternatives, [Korea] is shaping up as a choice investment,” said Cho Suk-bang, another BOK official.

Japan has not confirmed whether it will buy Korea’s treasury bonds but has said it is now open to the possibility.

Seoul views the agreement as a positive move that could contribute to the overall development of the nation’s bond market.

“The U.S. bond market developed after it suffered a fiscal deficit,” Hong of the BOK said. “When a government increases spending there are only two ways of securing finance - higher taxes or bond issuances.”

Meanwhile, delegates representing the Asean+3 trade bloc said they have decided to expand the Chiang Mai Multilateralization Initiative (CMMI) from $120 billion to $240 billion. This comes as the euro zone’s debt woes make countries there less dependable creditors.

Korea’s contribution, which has doubled from $19.2 billion to $38.4 billion, accounts for 16 percent of the total contribution. China and Japan each make up 32 percent.

The Asian trading bloc’s statement noted that yesterday’s agreement will serve as a financial safety net in the region.

The Chiang Mai Initiative (CMI), a series of a bilateral swap contracts aimed at overcoming liquidity crunches, was first created during the Asean+3 meeting in 2000. It was officially launched the following year as Asia was still trying to recover from its financial crisis of 1997. The fund was stepped up in 2010 as the global market crashed unexpectedly in late 2008.

In a move to reduce their dependency on larger entities like the International Monetary Fund, delegates agreed yesterday to raise IMF de-linked portion each country can access for aid from 20 percent of the total to 30 percent. This will be raised to 40 percent by 2014, providing conditions warrant the change, they said.

By Lee Ho-jeong []

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