Over the past two decades, the Asian region has grown at roughly twice the rate of the US and Europe. But we also cannot forget how brutally and suddenly economic progress was often brought to a standstill or sharply set back, with debilitating consequences for all.

And the worst of these disruptive episodes have a financial label attached to them, with the latest one distinctively named the "Asian Financial Crisis".

As leaders in business and government in Asia, we have a responsibility to ensure that the rapid economic growth we are enjoying and sharing is balanced, stable and sustainable.

In "driving growth to the next level", we must therefore focus on improving the quality, and not just maintaining the speed, of economic growth.

The unpleasant experience of financial crises in this region tells us that one central area requiring greater attention is finance.

Indeed, as our great leader Deng Xiaoping once said: "Finance is very important; it is the nucleus of the modern economy".

I would describe the current financial arrangements in Asia as an incongruous state of affairs that cannot sustain economic growth in the region.

About half of Asia's total trade is now intra-regional. And it is fully market-driven, motivated by the mutual benefits derived from comparative advantage in production and trade.

Although about 56% of trade among non-Japan Asia still goes towards meeting import demand among economies outside the region, this proportion has been declining, and is likely to keep declining as regional demand grows.

Integration pace

And there are many other aspects of growing economic partnership associated with trade integration in this region. By contrast, the pace of financial integration, however you choose to define it, seems to be lagging seriously behind.

The benefits of financial integration in the region seem so obvious now. They are obvious in terms of greater efficiency in financial intermediation, greater financial stability and greater sustainability of economic prosperity - in other words, attaining the type of quality growth, or "growth at the next level", that we are attempting to drive the region towards.

Perhaps financial integration is still too far-fetched an idea today, if we define it as taking small, fragmented markets that can be easily tossed around by international capital, and pool them into one large and highly liquid market capable of absorbing volatility, through the use of a common currency, or monetary union.

In this context, Hong Kong's experience in operating a currency board system for nearly 23 years shows that conceding the sovereign right over monetary policy is not as big a deal as it sounds.

I am glad to see increasing interest in the subject in various established forums in the region, and I understand that the Asian Development Bank is keen to structure an Asian Currency Unit in an effort to contribute to research and discussion on it.

But we need not arrive at a consensus now on monetary union as the final goal.  There are areas of financial integration well worth pursuing in their own right.

5 concerns

They lead to some of the benefits that I have mentioned, without committing individual jurisdictions to something that may be politically difficult to deliver.  I can think of five such areas.

The first involves linking financial infrastructures across jurisdictions.

The second area of financial integration concerns the relaxation of restrictions on access of foreign financial intermediaries to domestic financial markets

The third area of financial integration involves the harmonisation of financial standards within the region

The fourth area of financial integration concerns strengthening co-operative efforts between jurisdictions in developing their domestic financial systems

The fifth area of financial integration is quite crucial. It concerns the promotion of greater cross-boundary capital flows, which for some would mean relaxing capital controls

I have set out these areas of financial integration in general terms because, while they require co-operation and co-ordination, there is perhaps no single model to apply to every jurisdiction.

Diversity challenge

It is a feature of regional economic integration that we each develop our comparative advantage. We are also a geographically and culturally diverse region. This diversity presents an extra challenge to integration, but it makes it all the more worthwhile. 

Whether greater regional financial integration will ultimately lead to a common Asian currency is, perhaps, a question that many of us will not be able to answer in our lifetimes. But, at least the subject is now attracting discussion in wider circles, which is encouraging.

For our part, Hong Kong is working with other jurisdictions in the region towards increasing infrastructural linkages and implementing initiatives such as the Asian Bond Fund. 

We are fortunate to have the free flow of capital in and out of Hong Kong, and the free operation of markets generally, guaranteed by law.

We have recently been using these advantages, and our position as an international financial centre, to develop an efficient, low-cost, multi-currency regional clearing platform for fund transfers in the US dollar, the euro and the Hong Kong dollar.

In contrast to Europe and North America, this is traditionally a region with very little government debt. From what I have seen in the growing diversity of financial instruments and the booming IPO market in Hong Kong in recent years, I know the private sector is also playing its part - and will continue to do so.

In driving Asia's growth to the next level, I believe we should focus on the quality of growth and aim to make it more balanced, stable and sustainable. I also believe that greater regional financial integration in the five areas that I have discussed will contribute significantly to achieving this aim.

When Asian finance is better organised, we will collectively be less vulnerable to sharp and costly disruptions to economic progress.

With enhanced efficiency in financial intermediation and greater financial stability, growth will become more sustainable - and the people we serve will feel more confident about spending more and saving less, thus achieving more balanced growth.   Perhaps all this will also contribute to reducing or eliminating the global imbalance.

(This is an excerpt from Chief Executive Donald Tsang's speech at luncheon at the Boao Forum for Asia's Annual Conference 2006 in Hainan on April 22)