Bond issue to top APEC talks

The creation of an Asian bond market is top on the agenda of Pacific Rim finance ministers who meet later this week, but recent calls for China to liberalize its currency policy is also likely to hotly debated on the sidelines.

The Chinese currency issue has become a major concern for the US and Japan, whose finance ministers are coming to Phuket, Thailand, tomorrow and Friday for a meeting of the 21-member Asia Pacific Economic Cooperation forum. The Chinese finance minister will also attend.

On Monday, Japanese Finance Minister Masajuro Shiokawa and US Treasury Secretary John Snow agreed to urge China to reform its foreign exchange system. They want China to allow it's currency, the yuan, to appreciate.

Beijing kept the yuan at around 8.28 to the US dollar since 1994 _ a strategy that helped shield China from speculative currency upheavals during the 1997-98 Asian financial crisis.

But US and Japanese manufacturers have complained that the yuan is undervalued, leading to a flood of cheaper Chinese goods into their markets.

Beijing rejected calls for a significant revaluation, contending that it would be too risky for the country's shaky banking system and developing economy.

However, Chinese authorities in recent weeks have taken steps toward a more flexible exchange rate by increasing reserve requirements for commercial banks and loosening certain capital account restrictions.

"It is important we retain flexibility in currency markets so US manufacturers are not disadvantaged," Snow, who was in Japan, told reporters on Monday.

"My long-held view is that a well-functioning international financial system is one based on flexible exchange rates determined in competitive markets," he said.

Thailand, as the APEC meeting's host, hopes to play down divisive issues and further integrate the grouping. It's expected to push its initiative for a regional bond market.

"We will talk about the obstacles in the process of bond market integration, such as laws, taxation, the creation of credit rating and credit guarantee agencies and a clearing system," said Wisudhi Srisuphan, director general of the Thai Finance Ministry's Fiscal Policy Office.

"We will work out ways to create a single market," he said.

Wisudhi Western investors seem highly interested in Asian currency-denominated bonds, due to strengthening Asian currencies and higher interest rates.

In June, 11 central banks from the Asia-Pacific region launched an Asian Bond Fund by pooling US$1 billion worth of foreign reserves, which will be invested in dollar-denominated Asian bonds.

The plan aims to keep rising Asian foreign reserves within the region, while helping develop the Asian bond market. Central banks in the region hold more than US$1 trillion in foreign exchange reserves -- about half of the entire world's.

The finance ministers are also expected to promote cooperation in supporting small and medium-size enterprises.

Nine APEC members -- China, Japan, Hong Kong, Malaysia, South Korea, Singapore, Taiwan, Thailand and Vietnam -- are expected to sign a tentative agreement on Friday on cooperation between 11 financial institutions that support such enterprises, Wisudhi said.

The agreement may lead to a venture capital fund that will invest in the enterprises, he said.

APEC's members are Australia, Brunei, Canada, Chile, Indonesia, Mexico, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, and the United States.

The ministers will also assess the progress in achieving APEC's chief objective -- free trade among developed members by 2010, and among developing economies by 2020.

Efforts terrorist financing will also likely feature in the talks, following the Aug. 5 bombing of the JW Marriott Hotel in Jakarta and the recent arrest in Thailand of Hambali, a high-terrorist suspect.

Thailand host a summit of APEC leaders in Bangkok between Oct. 20 and Oct. 21.