Recently I heard an Asian friend giving a brilliant speech. He said that in the West, speeches start with a joke and end with a joke.

In Asia, he said, we start with an apology and end with an apology. And in between, it's all a joke!

I think Asians are more serious than that and since I don't know any jokes, let me plunge straight into the very serious subject before us: Should there be a single Asian currency?

Before we answer this question, we need to ask: Why do we need a single currency? 

Single Asian currency can facilitate unity

The simple answer is that if there is a sense of Asian unity, then a single Asian currency can either facilitate that Asian unity or become a common means towards that end.

But unfortunately, life is not that simple.  

First, Asia spans from the geo-politically sensitive and oil-rich areas of West Asia to, depending whether you agree or not, as far East as Australasia.

Asia as the third zone in the world is much more diverse than either the Americas or Europe. Asia accounts for 60% of global population, but less than one quarter of GDP.  

Asia ranges from the economic advanced country of Japan to some of the poorest economies in the world.

Japan alone accounts for 52% of Asian GDP and 60% of Asian financial assets.  

50 years to achieve a single currency

Second, Asia is unlike Europe that needed a single currency as part of a political union, and Europe has worked towards political and economic integration for over 50 years before the birth of a single European currency in 2001.

Even with common objectives, it took half a century to achieve a single currency.

Third, the rise of the Euro has created a serious alternative to the US dollar, and it is not currently clear whether there is room for a third global currency.

We must not forget that the Europeans experimented with different currency arrangements, such as the snake or crawling peg, which were subject to many speculative attacks before the Euro was successfully launched.

Can Asian unity and common understanding withstand such speculative attacks against Asian currencies during this transition?

Fourth, a single common currency requires deep and robust financial systems and markets, including strong institutional support.

Asia has just recovered from a crisis of global proportions, in which many domestic weaknesses in our financial systems have been exposed. Is our institutional and market base ready for the launch of such an important and strategic initiative?

All these are serious questions, requiring serious answers before the way forward is clear.

But the benefits of globalisation and Asian economic integration are clearly strong incentives for us to think about whether we should work towards a single Asian currency.

Asia benefited from globalisation

Asia has clearly benefited from globalisation. Asia's share of world merchandise exports has more than doubled from 10% in 1985 to 26% in 2003.

Intra-regional trade within Asia is growing at an average of 14% per annum over this period, double the average growth of global exports, and accounting for half of East Asian exports, compared with only 30% in the mid-1980s.

Trade is dominated by manufactures, and even though the product chain has been restructured by the division of labour throughout Asia, the ultimate consumption engine remains largely outside Asia.

The real issue within Asia is whether Asia can generate its own internal engine of domestic growth, rather than relying primarily on exports.

The corollary question is then whether a single currency or common currency arrangements would help the promotion of intra-Asian trade and investments.

Asian industrial restructuring and integration is being driven by FDI flows, particularly intra-regional FDI flows.

Total FDI flows into Asia had risen to US$103.2 billion in 2003, compared with only US$20 billion in the early 1990s.

HK - 7th largest investor

According to UNCTAD figures, Hong Kong is the largest outward direct investor among developing economies and seventh largest contributor to global outward FDI stock. 

Hong Kong's outward FDI to the rest of the world, especially Asia, amounted to US$336 billion at the end of 2003.

But let me be blunt. Most of the trade within the Asian region and with the rest of the world is still in manufactures.The share of services, particularly financial services, is still very small.

Why is this?

The answer is that Asia is strong in manufactures and natural resources, but relatively weak in financial services.

We are dominated by large domestic banking systems, our capital markets remain fragmented and we have not yet begun to build strong retirement and social security funds to provide for our ageing populations.

Asia as a whole runs a modest current account surplus with the rest of the world, equivalent to 1% of GDP in 2003.

Most of the current account surplus is placed with the financial markets in US and Europe, with foreign exchange reserves amounting to roughly US$2 trillion.

Most of those funds come back to Asia in the form of FDI and FPI (foreign portfolio investment).  

There is therefore a total equity return swap relationship between Asia and the capital markets outside Asia.

We place a large part of our savings outside the region, earning up to 4% annually in long-term bonds in dollar and Euro, and the money comes back to Asia in the form of leveraged FDI and FPI which earn up to 10-15% total return on equity.  

This is a symbiotic relationship, and a risk-sharing relationship that is good for all parties.

Financial systems have to be strengthened

But if we are ever to think about a common currency, we must think about how we must first strengthen our own domestic financial systems.  

As you well know, the Asian ministries of finance and central banks have been working hard on a deep and liquid Asian bond market since the launch of Asian Bond Fund 1 in June, 2003 and more recently, Asian Bond Fund 2 (ABF2) in April, 2004. 

As former Financial Secretary, I participated actively in these early stages of those discussions.

The Hong Kong Monetary Authority has been working hard with regional central banks to launch both products, especially ABF2, which will be sold at the retail level. 

The objective of ABF2 is to act as a catalyst to promote new products, improve Asian market infrastructure and reduce regulatory hurdles in Asian markets that prevent intra-Asian trade in financial products.

Diverse background leads to regulatory barriers

In this regard, for a host of historical reasons, because of diverse legal and institutional backgrounds, Asia has unwittingly erected regulatory barriers against trade with each other in a variety of financial products.

We have the irony of growing free trade in physical goods, but relatively little free trade in financial products within Asia.

For example, it is easier for a mutual fund registered in Luxembourg or a bond listed on the Irish Stock Exchange to be traded within Asia than for a Hong Kong mutual fund to be permitted to be traded in any of the Asian markets and vice versa.

Each Asian financial product has to be individually approved and registered before it can be traded.

This explains why there is little cross trading of Asian financial products.

This does not make sense, since there is no reason why Asian regulatory standards cannot be harmonised according to international standards.

Towards this end, the Hong Kong Securities & Futures Commission has begun to sign letters of intent with regional jurisdictions to facilitate greater regulatory harmonisation in line with international (IOSCO) standards.

So far, we have signed LOIs with Indonesia, Thailand and Sri Lanka. These bilateral LOIs will facilitate more and more Asian financial products (beginning with mutual funds) to be traded within Asia, paving the way for ABF2 to reach the retail market across Asia.

Our work with regional central banks and securities commissions represent concrete and pragmatic steps in building regulatory co-operation with each other.

Once Hong Kong and other jurisdictions learn from each other in terms of regulatory co-operation, many more Asian financial products can be traded within Asia.This will generate critical mass for Asian savings to be re-invested within Asia.

Free trade key to monetary integration

Without greater free trade in Asian financial services, monetary integration cannot happen successfully, if at all.

In short, we must learn to walk before we can run. As someone who is totally realistic and pragmatic in the way forward in Asian monetary and financial co-operation, we must first create the conditions for greater free trade in financial services, before we even begin to talk about monetary integration and co-operation.

The Boao Forum is one such forum where we can truly and frankly help build that understanding and friendship whereby a free and prosperous Asian market can be built.

As one of the premier financial centres in the Asian time zone, Hong Kong pledges to work closely with all its trading and regional partners to build the conditions for greater financial and monetary co-operation in the future.

The case for a single Asian currency, in my view, is overwhelming from the points of view of regional economic stability and growth in Asia.

It is particularly critical in warding off painful ruptures of national currency systems across the region as we saw in 1997 and 1998.

In this regard, I do not have rosy dreams to offer today, but only concrete and tentative steps forward.

But in Asia, we understand very well that the journey of a thousand miles begins with the first step.  

Acting Chief Executive Donald Tsang gave this address at the Boao Forum for Asia Annual Conference 2005 held in Hainan Province.