Research On The Revenue, System Design And Real Conditions Of The Foreign Exchange Reserve Pool In East Asia

A foreign exchange reserve pooling system is a system innovation between different countries with the same purpose of saving foreign reserves. Meanwhile it is also a result of fierce system competition between different economic groups all over the world. As a product of the Chiang Mai Initiative, the reserve pooling system is one important step in the process of the financial cooperation and integration in East Asia. It should define itself as an institutional arrangement to buffer the financial crisis, as well as a function to nip the risk in the bud before they develop into a full-blown crisis. Firstly the author gives his own definition of the foreign exchange reserve pooling system as well as investigates the characteristic, nature and functions of it. Secondly this essay introduces and comments on the different foreign exchange reserve pools prevailing all over the world. Then the author returns to the analysis of the issues in East Asia by a summary of the status quo of the foreign exchange reserve pooling system in this region. What is more the writer proves that the system in East Asia is the Kaldor - Hicks improvement by a simple quantitative analysis of the benefit of the system, after which the author gives his own institutional design of the reserve pooling system in East Asia, explores on the favorable and unfavorable factors in nurturing such a reserve system in East Asia. Last but not the least the author talks about the effects of the East Asian foreign exchange reserve pool.The first chapter describes the current findings on the issues of the foreign exchange reserve pooling system and the East Asian financial cooperation. there is also an presentation of the background and purpose of writing this paper.Chapter II starts by the concept of the foreign exchange reserve pooling system and gives a summary of the characteristic of the reserve pooling system in East Asia ,explores on the nature and functions of the foreign exchange reserve system. Then the essay gives a sample analysis of the reserve pooling system prevailing all over the world. Under the principle of consensus and mutual benefit, Member countries subscribe part of their foreign exchange reserves to the mutual foreign exchange reserve fund which is jointly managed and fairly used by them, functioning in a mechanism to serve the purpose of regional financial security and economic development. The foreign exchange reserve pooling system characterizes itself by the Scale Merit, Reciprocal Agreement and Restrictive Covenants on loan. The reserve pool has a certain nature of public resource. So it is necessary to make some limits on the application of the fund to defense itself from moral hazard. Its functions are to facilitate the payments among multilateral trade, to provide emergency credit, to stable the exchange rate in this region, to maintain and increase the values of the reserve asset, even to create a new foreign exchange reserve currency. The author found that the function of the reserve pooling system evolves with the levels of cooperation and integration, after an analysis of different reserve pooling systems. The reserve pooling system should do more in nurturing the basic instruments in local market than just provide emergency loans.The third chapter summarizes the background of the foreign exchange reserve pooling system, introduces the status quo of the East Asian foreign exchange reserve pool at first .Then the author concludes that the foreign exchange reserve pool is a Kaldor - Hicks improvement after a simple quantitative analysis of the foreign exchange reserve pooling system in East Asia. After a calculation of the gains and loses of the East Asian reserve pool, the author proves that the gains of East Asia as a whole cover the cost of China and Japan in founding such reserve pooling system in East Asia.In Chapter IV the author gives his own design of the East Asian reserve pooling system. Furthermore, there is also an investigation about the positive and negative conditions on establishing the reserve pool in East Asia. At present the member countries run the foreign exchange reserve that they subscribe to the pool by themselves in daily time. When the emergency happens they would gather the foreign exchange reserve together to help the country in need. The author argues that this kind of self- manage mechanism is invalid due to its innate moral hazard and it is bad for the integration of local currency cooperation. Then the author demonstrates the necessities of actualizing a mechanism of mutual management of foreign exchange reserve. This essay makes a bold step in designing the operational system of the foreign exchange reserve pool in East Asia according to the institutional arrangement of IMF. The author suggest that the pool should set up four separate department to enhance the standard regional monitoring system in East Asia, to improve the regional trade, deepening the development of Asian Debt Market, and to make a more active exploration to promote the cooperation of exchange rate in East Asia. Meanwhile the author makes plans for the different department. There are some favorable conditions in constructing the reserve pool in East Asia such like the titanic scale and fast growing speed of the foreign exchange reserve in this region, the high level of trade integration, the similarity in the financial structure etc. On the other hand the invalid basic instruments in the financial market and the underdeveloped debt market are the unfavorable conditions in nurturing a reserve pooling system in East Asia.In chapterⅤthis essay analyze the effect of the reserve pooling system in East Asia and forecast on the prospect of it. The foreign exchange reserve pooling system has done a good job in defending the region against the crisis and monitoring the risks that may arise in the region. It is also inductive in stabilizing the financial system all over the world. In the future the East Asia will introduce some law to make sure that the reserve pooling system runs independently. It also needs to keep a close relationship with IMF in order to make a progress in helping countries in need.