In part, this is due to the differences in character between domestic and foreign savings. Those managing foreign savings are, understandably, much less concerned about the long-term public interest than those managing domestic savings. Foreign savings are also much more sensitive to changes in market sentiment and shifts in domestic policies, and are more prone to reversals. While this imposes greater discipline on local authorities in pursuing prudent macro-economic policies, it also brings much higher volatility in the financial markets, to the extent of possibly creating systemic problems that Asian monetary authorities are ill-equipped to handle. Furthermore, the foreign financial intermediaries are usually large international financial institutions with considerable market power and influence, in terms of the amount they are in a position to mobilise, relative to the size of the domestic financial markets of the emerging economies. This enables them to operate in the market not simply as price takers, but as a “price maker” with the power of pushing prices in a particular direction. The implications for the emerging markets are greater market volatility, greater tendency for overshooting, and consequently, greater challenges in maintaining monetary and financial stability. The problems are more intense for emerging economies with medium-sized financial markets that are large enough to attract foreign capital but not large enough to be immune from the manipulative or speculative plays that are, more often than not, associated with these fund flows.
Under this initiative, four member economies of APEC - China, Thailand, Mexico and the Philippines - have volunteered to receive expert advice through visits from panels of experts. The objective of these visits is to assist the economies in question in identifying potential impediments in their markets and in removing these impediments through specific, achievable and monitored action plans tailored to the individual economy. The programmes under this initiative are making good progress, and, in addition to the panel visits, two policy dialogues have been held to promote understanding and experience-sharing. A second cluster of initiatives, under the ASEAN+3 forum, involves a variety of studies known as the Asian Bond Market Initiative (ABMI) on issues such as new securitised debt instruments, issuance of debt by international financial institutions, regional credit guarantees and enhancement facilities, and the establishment of local and regional credit rating and credit enhancement agencies. The third set of initiatives falls under EMEAP - the Executives’ Meeting of East Asia-Pacific Central Banks - and takes the form of bond funds aimed at channelling a small portion of the very large official reserves held by the Asian economies into the region. The first of these funds - Asian Bond Fund I (ABF1) - was launched in June 2003 and is now fully invested in US dollar-denominated bonds issued by sovereign and quasi-sovereign issuers in the EMEAP economies. The EMEAP Central Banks are currently working on ABF2, which will invest in local currency-denominated Asian bonds.