This paper argues that renminbi (RMB) internationalization and China's strategic interests in ASEAN will combine to deepen economic integration and pave the way for creating a de facto RMB bloc consisting of the 10 ASEAN countries, China, Hong Kong, and Taiwan—a grouping we call ASEAN+New3. Such a currency bloc is likely to weaken the initiatives of the existing ASEAN+3 (China, Japan, and Korea) for regional monetary-financial cooperation because neither Japan nor can Korea join the new currency bloc for economic and political reasons. This paper also argues that RMB internationalization would delay the resolution of the trade imbalance between East Asia and the United States because China would be pressured by the other members of ASEAN+New3 to maintain stability of the RMB vis-à-vis the U.S. dollar.

Countries in East Asia (EA) have made a great deal of progress in integrating their economies since the early 1990s. There has been a sustained increase in intra-regional trade in EA. On finance, however, regional financial integration has been lagging behind trade integration and EA has reached out to global financial markets to effect deeper global integration. The purpose of this paper is to analyze the effects of intra-regional and extra-regional financial integration on changes in the pattern of EA's business cycle since 1990 to see whether there is any ground for “decoupling” of EA from the United States and the EU. On trade relations, the empirical results show that deepening trade integration contributes to more synchronized output movements among EA countries. There is also evidence that financial integration enhances more synchronization of output, but because its impact is not strong, the extra-regional integration does not necessarily dispute the prediction that EA's output movement has become more idiosyncratic than before, and therefore less closely tied with that of the United States.

The 1997 Asian financial crisis has helped to further regional financial and monetary cooperation. The purpose of this paper is to examine these efforts, their recent developments, and to predict the prospects of such cooperation. In order to deepen financial and monetary integration, the region must overcome several difficulties. The region's appetite for financial market liberalization has been dampened by the crisis and countries are building up foreign exchange reserves instead of reforming domestic financial markets. The diverse structures and development levels of the financial sector among the members is another obstacle. The fact that Japan does not have strong incentives for monetary integration and that the business cycle of member countries is not synchronized are obstacles to monetary integration. Also, the proliferation of FTAs has turned attention away from regional cooperation. Finally regional cooperation needs a leader that can bring impetus to institution building. As the two possible candidates, China and Japan, have been competitors rather than collaborators, the most realistic scenario for regional cooperation is that the ASEAN + 3 countries will muddle through and that the process will be painstakingly slow.

Creating regional bond markets in East Asia has emerged as an important policy topic in discussions of how to promote regional monetary and financial cooperation to prevent future crises in the region. We evaluate the rationale and the strategies and propose a road map for developing regional bond markets in East Asia. We propose a market-oriented approach to development of the regional bond markets with the role of the official sector limited to such activities as building the regional financial infrastructure. We also suggest that the eventual goal of regional bond market development should be the development of domestic bond markets in the region. If domestic bond markets are fortified by domestic financial infrastructure and are deregulated and opened to foreign borrowers and investors, many of the Asian countries will be able to mitigate maturity and currency mismatch problems.

As was the case in the Mexican crisis of 1994–95, the G-7 and international financial institutions appear to have lost their zeal to garner the support they need for reform. The ongoing debate on the future direction of international financial reform suggests that most of the problems are likely to remain unchanged. This pessimistic outlook arouses a deep concern in developing countries that they will remain vulnerable to future financial crises, even if they faithfully carry out the kinds of reform recommended by the IMF and the World Bank. Given this reality, developing countries may have to develop a national or regional defense mechanism of their own by instituting a system of capital controls, adopting an exchange rate system that lies somewhere between the two-corner solutions, or strengthening regional financial cooperation.