Asia was adversely affected by the global financial crisis not only because of its dependence on trade, but also because of its heavy reliance on the US dollar for regional and international transactions. As Asia’s role in the global economy expands further, its dependence on the US dollar is bound to increase, raising even more its vulnerability to future liquidity shocks. The use of regional currencies for bilateral trade settlement could reduce such vulnerability.

The renminbi trade settlement scheme piloted between the People’s Republic of China and Hong Kong, China demonstrated that the existence of appropriate financial infrastructure could reduce the relatively larger costs of bilateral currency transactions compared with triangular transactions through the US dollar. This paper proposes that extending the trade settlement scheme to the rest of Asia and appending a government bond payment and securities settlement system could be a practical solution to international monetary system reform and the diversification of settlement currencies.

In December 2012, the Asian Development Bank, CIGI and the Hong Kong Institute for Monetary Research co-hosted a conference in Hong Kong, China. The papers in this series, authored by esteemed academic and policy experts, were presented at the conference and were subsequently revised. These working papers are being published simultaneously by all three partners.