Creeping Unification; Quiet moves in bonds, stocks and cash reserves are bringing an Asian financial union ever closer.

Byline: Stephen Glain

An auction for $12 billion worth of U.S. Treasury bills has gone from routine to catastrophic. Prices are cratering as demand plummets. Share prices and the U.S. dollar tumble in value. Panic builds as the cause for the failure becomes clear: the Central Bank of Asia, balking at America's spendthrift ways, is shedding dollars in favor of Asian bonds denominated in the region's new unified currency, the yenminbi.

A fantasy forecast? Maybe. But Asian governments are taking subtle steps toward a financial union that echoes the unification of Europe. True, an Asian central bank and unified currency could be more than a decade away, but financial integration is accelerating. Asian central banks are already moving to pool cash reserves in order to help bail out regional economies in times of crisis. Asian debt markets are starting to issue bonds in local currencies, rather than the dollar, while Asian stock exchanges have started to sell shares in companies from neighboring countries. The goal, say economists and bond specialists, is to put Asian capital to work in Asia, and to begin weaning Asia off its reliance on the increasingly wobbly dollar. "The plumbing is in place," says Mohamed El Erian, managing director of Pacific Investment Management Co., the world's largest bond investor. "There has been a lot going on behind the scenes."

The changes date to the crisis of 1997-98, which exposed the fact that Asian companies rely too heavily on local bank loans, in large part because they can't raise capital on weak or nonexistent bond or stock markets. The crisis also sparked interest in an Asian monetary fund, but that idea was slapped down by the United States, the International Monetary Fund and China, which feared that any regional agency would be dominated by Japan.

By mid-2003, however, an increasingly confident Beijing was promoting an Asian bond fund. The central banks of Australia, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore and Thailand pooled $1 billion to launch the first Asian bond fund, invested in dollar-denominated Asian sovereign debt. A second fund, launched in December with $2 billion in government capital, will invest in corporate debt issued in local currencies. ...