The Possible Use of Asian Monetary Unit - Differences between euro and AMU-
Japan-China-Korea (A3) Conference: Monetary and Financial Cooperation in the Region 24 May 2012, RIETI, Tokyo
Objectives The current crisis in Eurozone show us the difficulties to introduce a common currency in the region. Then, will we continue to use US $ as a key currency in Asia? A common currency basket in Asia (AMU, ACU) still have some roll in future Asian economy, since Asian economy is closely integrated. In order to find a new roll of AMU, we need to investigate the differences between the euro and AMU. From the lesson of the euro crisis, surveillance over intra- regional exchange rates by using AMU and AMU Deviation Indicators is important. At first, the coordination of exchange rate policy among A3 countries are needed. In addition, another possible usage of AMU might be recommended .
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Contents
1. Global Financial Crisis and AMU DI 2. AMU as a Surveillance Indicator 3. Internationalization of Asian Currencies 4. Possible use of AMU as a settlement currency 5. Policy Recommendation
3 A3 Conference@RIETI 1. Global Financial Crisis and AMU DI
4 A3 Conference@RIETI Differences between the euro and AMU The euro is “One currency for one Europe”. On 1st January 1999, the euro became the new official currency of 11 Member States, replacing the old national currencies. Without a monetary autonomy, Euro economy is facing a severe sovereign crisis. The euro has no ability to adjust trade imbalance in the region. The AMU is just an artificial “basket” currency composed of 13 East Asian currencies. The AMU is similar to the ECU, which was used as the unit of account of the EC before being replaced by the euro. Ogawa and Shimizu (2010) propose the AMU as a surveillance indicator of AMRO.
5 A3 Conference@RIETI Impossible Trinity Many Asian countries including China still keep capital controls, which become an obstacle of high transaction costs of Asian currencies. Capital Controls
Asian countries Fixed exchange rates means Increased no ability to adjust trade Capital imbalance in the region. Mobility
Pure Floating Monetary Union Without an exchange rate stability, Without a monetary autonomy, Japanese economy is straggling with Euro economy is facing a severe a strong yen. sovereign crisis.
Introducing a common currency in Asia might be a far-distance future objective! 6 A3 Conference@RIETI Euro Countries Current Account (as a percentage of GDP, %)
Deutsche Netherland Other surplus countries France
Spain Italia Other deficit countries Euro 12 4.00 1.50
3.00 1.00 2.00
1.00 0.50 0.00
-1.00 0.00
-2.00 -0.50 Other surplus countries: Belgium, Luxembourg, Austria, Finland -3.00 Other deficit countries: Ireland, Greece, Portugal -4.00 -1.00 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
7 A3 Conference@RIETI Source: European Commission, AMECO Currency regimes in Asia After RMB’s regime change, most Asian countries started to adopt managed or free float. Since 3rd Q of 2010, Asian currencies except HK$ have been more flexible vis-à-vis the US $. However, related researches indicate that coordinated exchange rate policies are not executed in Asia so far; Levy-Yeyati and Sturzenegger (2007) conjectured that exchange rate policies have evolved towards an apparent “fear of floating in reverse” or “fear of appreciation.” Rajan (2011) confirmed the existence of an asymmetry in central bank foreign exchange intervention responses to currency appreciations.
8 A3 Conference@RIETI De-jure Foreign Exchange regime in Asia
De-jure Exchange Arrangement of Asian Countries Country Arrangement in the 2010 AREAER China Stabilized arrangement1) Hong Kong Currency Board Indonesia Floating Japan Free floating Korea Floating Malaysia Other managed arrangement2) Philippines Floating Singapore Other managed arrangement2) Thailand Floating Source： IMF, AREAER 2010 1) Stabilized Arrangement is supported by official market intervention. 2) 3) Targeted policy band managed against a basket of currencies of the country's major trading partners.
9 A3 Conference@RIETI Asian currencies vis-à-vis the US$
Asian Currencies vis-a-vis the US $ (2000.1Q=100) 2000.1Q=100 160
150 Lehman Shock 140 CNY/USD
130 HKD/USD
120 IDR/USD
110 JPY/USD
100 KRW/US D MYR/USD 90 PHP/USD 80
70
60
10 A3 Conference@RIETI AMU Deviation Indicators (+)Group: Japan, 40 China, Singapore, Thailand, Malaysia Brunei 30 Cambodia 20 China P.R.
10 Hong Kong
0 Indonesia
-10 Japan
-20 South Korea Laos -30 Malaysia -40 (-)Group: Korea, Philippines -50 Indonesia, Philippines, Laos, HK, Cambodia Singapore -60 Thailand
Vietnam (Data: AMU-cmi, RIETI) 11 A3 Conference@RIETI Trade Balance within the region
(Million of US$) Surplus: Japan, China+HK, 100,000 Singapore, Malaysia, Viet Nam Thailand, Brunei (+Korea) Thailand 80,000 Singapore 60,000 Philippines
40,000 Myanmar Malaysia 20,000 Lao 0 Korea
(20,000) Japan
Deficit:Deficit: Indonesia, Indonesia (40,000) Cambodia, Lao, Myanmar, China + HK Philippines, Vietnam (60,000) Cambodia Brunei 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 Trade Balnce Data: DOTS (IMF)
12 A3 Conference@RIETI AMU DI and Global Financial Crisis Global financial crisis asymmetrically affected the Asian currencies. Plus: China, Singapore, Thailand, Brunei Minus: Indonesia, Philippines, Laos, HK, Cambodia, Vietnam Position Change: Japan (minus to plus), Korea (plus to minus) AMU DIs are strongly related with the trade balance in the region. Plus countries have surplus and minus countries have deficit in the region. Korea’s trade balance turned to large surplus after Korea’s AMU DI turned to minus. Watching the relationship between trade balance and AMU DI is important!
13 A3 Conference@RIETI 2. AMU as a Surveillance Indicator
14 A3 Conference@RIETI Differences between Euro countries and Asian countries Even now, the differences among Asian countries are still larger than those of euro countries. For example, we investigate the euro convergence criteria in the case of Asian countries ; Interest rate: Japan (0.9%) to Vietnam (10.4%) (10year bond, May 2012) CPI: Japan (-1.0%, 2010) to Vietnam (9.2%, 2010) Public debt (% of GDP): Brunei (0%, 2011) to Japan (229.8%, 2011) Budget deficit (% of GDP): Korea (+2.2%, 2011) to Japan (-8.5%, 2011) (Data: The World Fact Book, CIA) Above conditions suggest us that we do not keep all Asian currencies within a narrow band. The euro crisis teach us that fixed regime is not suit for countries with the great differences.
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AMU as a Surveillance Indicator
We need to decide some rules to use AMU DI as a surveillance indicator to stabilize the intra-exchange rates. At first, only main currencies, such as Japan, China, Korea + Singapore, Thailand, Malaysia to keep within a band (The total basket share of these currencies is almost 90 %). The previous AMU DI figure shows that the above currencies except Korean won have been within +/- 10% band since Jan 2009. For other deficit currencies, they may stay large minus until their trade balance is improved. Or, we set their benchmark exchange rate realign.
16 A3 Conference@RIETI AMU Deviation Indicators
40 Brunei 30 Cambodia 20 China P.R.
10 +/-10% Hong Kong 0 band Indonesia
-10 Japan Monitor -20 Trade South Korea balance Laos -30 Malaysia -40 Philippines -50 Realign benchmark after a recovery if needed Singapore -60 Thailand
Vietnam (Data: AMU-cmi, RIETI) 17 A3 Conference@RIETI 3. Internationalization of Asian Currencies
18 A3 Conference@RIETI Differences between Euro trade and Asian trade Both region’s intra-trade share are high. In euro-area, the euro is a vehicle currency in the region. Changes in the global and East Asia trading structures over the past decade are confirmed: East Asia production network has been expanding its supply and demand of intermediate goods in the region. China’s increasing presence as an assembly and export base. ASEAN has started to play a role expanding the supply of intermediate goods to China. The possibility of the East Asia network to be a “world production and demand network” is to be confirmed. However, these transactions are mainly invoiced in US$!
19 A3 Conference@RIETI Trade of intermediate and final goods in East Asian countries/regions (FG: Final Goods, IG: Intermediate Goods) [1999] (100million of US$) [2009] (100million of US$) FG IG FG IG
Korea Korea Japan Japan
China China
E U U S E U U S
(Source: White Paper on International Economy and Trade 2010 (METI), RIETI-TID 2011) 20 A3 Conference@RIETI Internationalization of the Japanese yen
The share of the Japanese yen in Japan’s trade rose significantly in 1970s and 1980s at the backgrounds of the following factors. − Collapse of Bretton Woods regime: From fixed exchange rate system to floating exchange rate system − The Japanese yen achieved full convertibility through liberalization of foreign exchange and capital controls. − Expansion of Japan’s economy and financial markets
The rise of the share came to a halt since 1990s. − Long stagnation of the Japanese economy − Dominant presence of US dollar in East Asian region
21 A3 Conference@RIETI Yen invoicing share of Japan’s trade and Road to the full convertibility of the Japanese Yen Establishment of free yen account However, Yen invoicing Abolition of authorized for non-residents share is still below foreign exchange 50%! (percent)Abolition of real banking system 45 demand principle 40
35
30
25
20
15 Exports Imports 10
5
0 1960 1965 1970 1975 1980 1985 1986 1987 1988 1989 1990 1991 Sep. 1997 Sep. 2006 Sep. Sep. 1992 Sep. 1993 Sep. 1994 Sep. 1995 Sep. 1996 Sep. 2001 Sep. 2002 Sep. 2003 Sep. 2004 Sep. 2005 Sep. 2007 Sep. 2008 Sep. 2009 Sep. Mar. 1993 Mar. 1994 Mar. 1995 Mar. 1996 Mar. 1997 Mar. 1998 Mar. 2001 Mar. 2002 Mar. 2003 Mar. 2004 Mar. 2005 Mar. 2006 Mar. 2007 Mar. 2008 Mar. 2009 Mar.
Source: Ministry of Finance, Trade Statistics of Japan; and other sources 22 A3 Conference@RIETI The Internationalization of the RMB
The Standing Committee of the State Council decided in December 24, 2008, to launch RMB settlement trials. Goods traded between the Guangdong-Pearl River Delta area and Hong Kong-Macau, and between the Guangxi-Yunnan region and the ASEAN. China concluded bilateral swap agreements with Republic of Korea, Hong Kong, Malaysia, Belarus, Indonesia, and Argentine to provide RMB liquidity for trade and direct investment. As the government expand the pilot program in 2011, RMB invoicing is rapidly increasing, although the ratio is still low because of the followings; Strict foreign exchange and capital controls Domestic financial system needs to be more transparent.
23 A3 Conference@RIETI RMB’ Cross-border Settlement Amount
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4. Possibility to use the AMU-3 as a trade settlement currency
25 A3 Conference@RIETI Differences between ECU and AMU
ECU AMU Objectives To maintain stable exchange To maintain stable exchange rate rate among EEC countries. among East Asian countries. Anchor The Deutsche Mark No anchor currency (Yen, RMB?)
Official use Yes, by EMS central banks No (CMIM, AMRO?) Private use Yes, mainly as a denominated No (ADB, ABMI?) currency of bond issues and ECU deposit Clearing Yes, the BIS as accounting No agent and commercial banks to the clearing system
26 A3 Conference@RIETI The Experience of the euro as a regional vehicle currency The European Monetary System (EMS) contributed to a substantial reduction in the spreads of cross-foreign exchange rates among European currencies. It helped West German mark to take over the US dollar as a vehicle currency in Europe in 1980s. The euro has steadily increased its share in the settlement and invoicing of trade in euro and non-euro area EU countries. The share of local currency invoicing also has increased. The role of the US dollar as a vehicle currency is becoming less important in EU countries. This implies that the regional monetary and financial cooperation could be effective in promoting the use of a regional currency. 27 A3 Conference@RIETI Currency Breakdown of Exports and Imports of Goods (outside the euro area) Euro countries Non-euro Countries Export Import New euro area Export Import & Local Local Euro area countries Non-euro area Euro USD Euro USD Euro USD Euro USD EU countries currency currency Bulgaria Belgium 2001 48.1 49.0 … 55.5 41.8 … 2002 53.6 32.5 53.7 34.5 2006 57.7 40.2 … 58.9 39.0 … 2006 58.5 31.9 58.3 35.0 Czech France 2001 68.7 14.1 10.3 66.6 19.7 7.7 2001 50.8 41.0 42.6 45.7 2007 72.0 15.9 … 68.0 22.6 … 2007 51.3 36.8 44.2 46.2 Denmark Germany 2001 32.8 25.3 22.3 36.3 23.1 27.9 2007 34.3 19.3 28.0 32.7 18.1 38.9 2002 50.1 30.5 48.4 35.3 Estonia 2007 65.2 21.3 56.9 37.2 2001 53.8 14.0 21.2 53.9 25.7 5.2 Greece 2007 57.8 17.7 18.6 58.5 19.4 17.0 2001 23.5 67.7 29.3 61.5 Hungary 2007 39.2 57.2 34.9 62.5 2001 79.4 15.7 … 70.5 21.7 … Italy 2004 84.8 9.6 … 70.8 18.8 … 2001 52.7 34.6 40.8 50.8 Latvia 2001 34.1 41.4 … 44.5 37.3 … 2007 64.5 30.2 44.6 51.9 2007 59.5 28.9 3.5 67.2 22.1 5.5 Luxembourg Lithuania 2002 44.0 38.3 31.9 47.5 2001 27.8 58.8 8.0 38.3 52.9 1.2 2007 59.2 30.3 37.9 49.6 2007 56.5 36.0 5.0 55.4 37.6 0.6 Netherlands Poland 2001 47.8 39.2 41.1 48.5 2001 57.2 33.8 4.1 57.7 32.9 4.6 2002 52.0 35.2 48.0 43.8 2007 69.8 17.2 9.0 59.1 26.9 11.2 Romania Portugal 2001 55.7 39.5 … 60.6 35.1 … 2001 40.3 41.3 50.3 40.5 2007 67.7 29.5 … 71.5 26.7 … 2007 61.4 31.5 51.3 44.7 Slovakia Spain 2001 71.0 15.0 5.9 58.0 24.0 5.1 2001 52.0 38.4 49.7 43.7 2007 95.8 3.1 0.4 82.4 15.9 0.4 2007 65.2 28.6 56.7 40.9 Slovenia 2001 85.0 10.3 … 79.0 15.7 … Average change from 2007 89.2 8.0 … 84.0 14.6 … 11.3 ▲ 6.7 5.0 0.4 Average change from 2001 to 2007 12.0 ▲ 8.3 8.0 ▲ 6.2 Source:28 European Central Bank, "The Review of the International Role of the Euro" July 2001 to 2007 2009. Source: European Central Bank, "The Review of the International Role of the Euro" July 2009. Create AMU-3 for trade settlement
Creating a common currency in Asia will be a useful method to free Asian countries from the US dollar over-dependence. As the previous figure shows, the trade linkage among Japan , Korea and China are strong. Why don’t we create a trade settlement currency composed with Yen, Won and RMB, so-called “AMU-3”? In order to change the US dollar standard in Asia, not a single Asian currency’s internationalization, but a Japan-China-Korea coordinated internationalization would be better. At the same time, create the CLS banks in Asia to handle clearing of AMU-3 settlement, which will promote the local currency invoicing in the region.
29 A3 Conference@RIETI AMU-3 The basket share of AMU-3 is based on each country‘s contribution proportion of CMIM. JPY:RMB:KRW=32:32:16
AMU-3 vis-a-vis the US$ (benchmark period:2000/2001) 1.4 1.3 1.2 1.1 USD/AMU-3 1 USD/RMB USD/JPY 0.9 USD/KRW 0.8 0.7 0.6
30 A3 Conference@RIETI In the case of Japanese trade If Japanese firms use AMU-3 invoicing for export/import with China and Korea;
70% 62.3% 50% 45.1% 60% 40% 50% 26.3% 40% 30% 18.1% 30% 20% 20% 15.8% 13.1% 9.0% 7.0% 10% 10% 0.6% 0.2% 0.9% 0.6% 0.3% 0.6% 0% 0% US$ JPY RMB KRW THB euro Others US$ JPY RMB KRW THB euro Others
31 Local currency invoicing share: 83.0% Local currency invoicing share: 72.8% (Author’s calculation, Source: MOF) 5. Policy Recommendation
32 A3 Conference@RIETI Policy Recommendations AMU for surveillance: Define AMU and AMU DI for surveillance purpose. We recommend the AMU based on CMIM weights. Set the narrow fluctuation band (+/-10%) for trade surplus countries at first. For deficit countries, monitor the AMU DI and their deficit carefully, and realign the benchmark exchange rate if needed. AMU for trade settlement: Create AMU-3 (Japan, China, and Korea) and AMU-3 CLS banks. Japan, China and Korea corporate each other to free their firms from the US dollar over-dependence. 33 A3 Conference@RIETI
References:
ECB, (2009) “The Review of the International Roll of the Euro” Levy-Yeyati, E. L. and F. Sturzenegger. (2007) “Fear of Floating in Reverse: Exchange Rate Policy in the 2000s,” Unpublished mimeo. Ogawa,E. and J. Shimizu (2010) “Asian Monetary Unit and Monetary Cooperation in Asia,” ADBI Working Paper Series No.275. Rajan, R.S. (2011) “Management of Exchange Rate Regimes in Emerging Asia,” ADBI Working Paper Series No.322. Data of AMU, AMUDI (RIETI, http://www.rieti.)go.jp/users/amu/en/detail.html)
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