Emerging Asian markets should consider monetary union for greater financial stability, Monetary Authority Chief Executive Joseph Yam says.

Speaking at a bank function in the Netherlands today, Mr Yam said although emerging Asian markets may be able to attract a net inflow of foreign savings into domestic investments during financial liberalisation, capital flows can reverse in view of domestic macro-economic issues and debilitate their financial systems and economies.

He said monetary union would bring better financial stability.

Asian dilemma

Mr Yam said some emerging Asian economies have adopted different formal or informal measures to regulate fund flows, which included limits to the convertibility of the domestic currency in either direction and limits to the ability of banks to expand their assets or liabilities denominated in the domestic currency.

He believed the small size of emerging Asian markets, relative to international capital, have made them vulnerable to financial instability.

"If one agrees with that argument, then one alternative long-term strategy is obviously to build a bigger integrated market that is capable of absorbing the volatility of international capital and reducing dependence on it through enhancing financial intermediation within that common market," Mr Yam said.

"In other words, in the interests of greater financial stability, emerging Asia should consider monetary union."

Difficulties remain

Mr Yam said although there has been no formal discussion among Asian authorities on monetary union, there has been some monetary co-operation efforts. However, he believes the difficulties in mobilising monetary co-operation in a diverse region such as Asia should not be underestimated.

"To some, I suppose there is doubt as to whether the benefits of greater financial stability and greater efficiency in financial intermediation justify the cost, in terms of autonomy over macro-economic policies, in particular monetary policy," Mr Yam said.

Emerging Asia has to address several issues, including the need for convergence before monetary union and the lack of an intra-regional currency anchor before any discussion on a more concrete plan of monetary union.

"My view is that, for something that takes so long, we'd better start early. For something that takes so long, we can also afford to be imaginative," he added.