MANILA (Reuters) - China, Japan and South Korea took steps on Thursday to tie their markets closer and agreed with their smaller Asian neighbors to boost their emergency protection against financial shocks.
The ASEAN+3 regional grouping agreed to double the size of their emergency liquidity program and made it more readily available by adding a preemptive function and reducing its compulsory link to the International Monetary Fund's bailout conditions.
A heightened sense of urgency due to the euro zone crisis helped the 13 countries strike an agreement that South Korean Finance Minister and co-chair Bahk Jae-wan described as the most noteworthy in the grouping's more than 10-year history.
In a further move to protect their financial markets from shocks, the three economic powers agreed to boost cross-investment in government bond markets, worth nearly a combined $15 trillion.
The series of agreements come as many of the export-oriented economies in the region seek ways to avoid a repeat of the 1997/98 Asian financial meltdown after facing recent crises originating outside their part of the world.
"We are fully aware of the potential downside risks to the region's economic performance in 2012," said the statement by the ASEAN+3 finance ministers and central bank chiefs, who met in Manila on the sidelines of the Asian Development Bank meetings.
"The prolonged sovereign debt crisis in the euro zone could continue to weigh on ASEAN+3 economies through trade and financial channels. Inflationary pressures remain, driven, in particular, by rising oil prices."
The agreement calls for boosting the size of the Chiang Mai Initiative Multilateralisation (CMIM) program to $240 billion by November, while cutting the amount tied to an IMF program to 70 percent from 80 percent and extending the maturity of currency swaps.
The program, created in 2000 initially as a network of bilateral currency swaps, has never been put to use because of the stigma associated with the IMF that angered the region for its insufficient bailouts during the Asian currency crisis.
"Memories of 1997-1998 keep coming in the way and that is why each country has built significant foreign reserves," Rajat Nag, ADB managing director general, told Reuters.
"But we hope Asia can move beyond that now."
The absence of top officials from China dented the mood somewhat as they were at home hosting senior U.S. officials. The Chinese delegation was headed by deputy chiefs of the finance ministry and central bank.
The region's three economic powers struck a formal agreement on their mutual bond holdings, a rare one on securities investment, to safeguard their capital markets against possibly massive cross-border fund flows.
"We agreed to promote the investment by the foreign reserve authorities in (each other's) government bonds, further strengthen our cooperation, including information sharing, and thereby enhance the regional economic relationship among the three countries," they said in a joint statement.
Local currency-denominated government bonds in the three countries amounted to $14.61 trillion at the end of 2011, with Chinese and Japanese bonds accounting for 97 percent of the total, ADB data showed.
Japanese Finance Minister Jun Azumi told reporters that the country would start with a small amount of purchases in Chinese and South Korean bonds as it hopes to diversify assets in foreign reserves for stable management.
"I believe the step is effective in boosting confidence in currencies and deepen the three countries' mutual trust," he said.
Working level officials are due to work out the specific methods and procedures of the cooperation as the three want to avoid conflicts that may arise from one country's massive holdings of another's bonds, South Korean officials have said.
China started buying South Korea's local-currency government bonds a few years ago but Seoul began to invest in Chinese bonds only recently. Japan also recently announced its plan to buy China's bonds.
Editing by Jacqueline Wong and Jonathan Thatcher