Current levels of financial integration among Asian economies do not reflect their increasing trade and economic relationships and give some cause for concern, Monetary Authority Chief Executive Joseph Yam says.

In his latest Viewpoint article, Mr Yam said Asian economies are probably less integrated with each other than with major economies in the rest of the world.

"All of them have probably lent more individually to, for example, the US than they have collectively to other Asian economies. But more than half of total trade in Asia is intra-regional," he said.

"Increasingly, we in the region are becoming more economically dependent on each other than on the western world. Yet our financial relationship is disproportionate to our economic and, in particular, our trade relationship."

Mr Yam said he is specifically not happy with five phenomena he has observed. First, Asia saves a lot of money, which is a reflection of the conservative culture.

"But, for a variety of reasons, we now find ourselves holding a substantial part of our savings in the financial liabilities of an economy that does not save. I find this phenomenon rather strange, perhaps inherently unstable," Mr Yam said.

Second, he said a significant part of the savings is recycled back into the region in a much more volatile form with a tendency to assume a predatory character, possibly creating financial havoc and monetary and financial instability in the region.

"Yes, we have ourselves to blame, as many of us were told when the financial downturn began here in 1997 and 1998, for not pursuing macroeconomic policies that are adequately prudent for our circumstances," Mr Yam said.

He said monetary and financial vulnerability is not just a function of the quality of macroeconomic policies, but also of the size and openness of the financial markets concerned.

Monetary integration

Mr Yam said through monetary co-operation, Asia's financial markets can attain the critical mass needed to absorb the volatility of international capital as effectively as the US and European markets. He believed this is the long-term solution for Asia and will help to address the global imbalance.

The fourth phenomenon is the heightened conservatism towards financial openness, particularly as a consequence of the financial downturn of 1997 and 1998, which will slow down the desirable process of financial and monetary integration in Asia.

But he said it is also understandable, for the authorities do have a duty to safeguard monetary and financial stability. And so capital mobility remains tightly restricted and the availability of credit in domestic currencies to non-residents has become a popular control lever.

Lastly, Mr Yam said there has been a rather rapid accumulation of foreign reserves in Asia, which is a risky process, adding this build-up also serves to reinforce, rather than to resolve, the global imbalance.

"It postpones the inevitable adjustment, whatever form it may take, and may make it a more destabilising one," he said.

Mr Yam said Asian economies should think about an overall strategy for financial integration, if monetary integration is too ambitious a goal for the time being, and seek support for it among their political establishments and peoples.