After an overall evaluation of the CMI and current financial situation, China, Japan, South Korea and the ASEAN members reached a consensus on establishing the $80-billion foreign exchange reserve fund. This move was important and significant for East Asian countries to increase their capabilities of collectively resisting financial risks and withstanding impacts of hot money flows.

Currency integrity

Now the U.S. dollar, as a reserve currency, is depreciating and becoming unstable, because of the impacts of the U.S. subprime mortgage loan crisis. This shows that the current dollar-dominant international monetary system is shaky.

The 1997 Asian financial crisis proved that the United States would ignore or sacrifice the interests of other economies. The United States usually uses the special status of the greenback to shift its domestic financial or economic crises onto others through currency depreciation or disguised depreciation. For example, while the dollar's ongoing depreciation on one hand lightens the foreign debt burden of the United States itself, on the other hand it traps a lot of economies around the world that hold large amounts of U.S. bonds and dollar reserves and forces them to appreciate their own currencies.

The U.S. currency policy also has triggered currency crises in other economies. For instance, Mexico experienced a financial crisis at the end of 1994, because the U.S. Federal Reserve constantly raised its benchmark interest rates that year, which caused Mexico's foreign investment to flow back to the United States.

East Asian economies now have the world's largest dollar-denominated reserves and highest proportion of dollar-denominated reserves to national gross domestic product. Therefore, they have suffered the largest losses from the dollar depreciation. If dollars constituted 90 percent of China's total foreign exchange reserve, then China would have lost $35.7 billion from this March to April. On March 27, Japan's Finance Ministry announced that the country had lost 18.5 trillion yen (about $187.2 billion) because of the dollar's depreciation.

Japanese auto giant Toyota Motor Corp. revealed that if the yen-to-dollar exchange rate rose by 1 yen, it would lose $350 million in annual profits. Economic experts believe that the weak dollar and excessive dollar reserves of China, Japan and major emerging economies have endangered the normal operation of the international monetary system.

Currently, East Asian financial cooperation remains in the primary stage. After the joint foreign exchange reserve fund is established, East Asia's financial cooperation will usher in a new era featuring joint financial crisis prevention efforts. If East Asian countries could deepen their financial cooperation and form a single currency zone, as did the eurozone, the entire international monetary system would be greatly influenced.

Once a single currency is created in East Asia and can rival with the dollar and the euro, it would allow East Asia to eliminate the passiveness brought by excessive dollar-denominated reserves and improve the region's capabilities to resist the impacts of changing monetary policies in the United States and the eurozone. More importantly, it would largely improve the fairness and stability of the international monetary system.

Practical mutual benefit

Although East Asia financial cooperation involves 13 countries, active input from China and Japan, as the region's two largest economies, is crucial. In the past, the two countries did not have enough mutual political trust and ASEAN countries had to negotiate with them separately to advance a regional free trade agreement. Now, China and Japan have enhanced their relations, and they show a responsible attitude toward world peace and development. This has largely strengthened the economic cooperation in East Asia.

It was not a coincidence that the establishment of the joint foreign exchange reserve fund was announced just before Chinese President Hu Jintao's state visit to Japan. On May 7, Hu and Japanese Prime Minister Yasuo Fukuda issued a joint statement on pushing forward strategic and mutual beneficial partnership between the two countries. Therefore, the setting up of the joint fund by the 13 East Asian countries is an important symbol of closer Sino-Japanese relations.

The depth and width of Sino-Japanese financial cooperation will be decided by the progress of bilateral political mutual trust. If the two sides can get rid of political obstacles and make some concessions to the other, their bilateral cooperation will bring brighter prospects than U.S.-Japanese cooperation currently does.

The development of Sino-Japanese relations is benefiting regional economic cooperation in East Asia. Strengthened regional economic cooperation in East Asia will, in return, tighten Sino-Japanese ties. In this way, the political and economic atmospheres will warm up together.