Financial cooperation is essential to the integration of Asian economies. To reinforce such cooperation， the key is to coordinate existing financial resources in Asia. Therefore， expanding the scope of the Asia Region Funds Passport（ARFP） is an important step [Note： The Asia Region Funds Passport is an initiative put forth at the APEC Finance Ministers meeting held in September 2013 in Bali， Indonesia].

Recently， progress has been made in the mutual recognition of regional funds among Asian countries， and an equivalent of the passport system for European funds is taking shape. Thus far， a total of six regional economies have participated in the ARFP， including Australia， South Korea， New Zealand， Singapore， Thailand and the Philippines. It is scheduled to be implemented in 2016， and is predicted to greatly promote financial development and stability in Asia.

The ARFP can reduce the present mismatches between currencies and funds. Emerging Asian economies generally rely on indirect financing provided by banks， which is prone to incur such mismatches. Since financial risks are concentrated in banks and the Asian financial system is still fragile， crises are in the cards when external emergencies pop up. In fact， after the 1997 Asian financial crisis， to ensure financial stability and economic growth， Asian economies have accelerated their economic restructuring and reforms and paid more attention to intensifying their fiscal and financial partnerships with neighboring countries. Yet， there still exists no effective system for mutual recognition and integration of regional coopera- tion mechanisms.

The establishment of ARFP can improve capital allocation and efficiency. Although they possess a high level of foreign reserves， most Asian economies invest them in developed countries treasury bonds， whose return rates are low. At the same time， many Asian developing economies cant raise funds essential to their developmental needs. There are so many obstacles in the supervision of cross-border capital flows that its difficult to source project capital from different countries， which widens the funding gap and hampers the efficiency of the utilization and allocation of financial resources.

Moreover， with the ARFP， worldwide crossborder capital flow will be facilitated. By the end of 2013， global hedge funds had accumulated assets totaling $2.01 trillion， a record high since June 2008. Now， China has roughly 6 trillion yuan （$980 billion） of funds， which need proper investment channels. Due to the absence of a regional mechanism for cross-border flows of funds， Asian investors have to register in Europe before investing in the funds of other Asian countries， which has not only increased costs， but also resulted in an outflow of capital. As the U.S. Federal Reserve gradually tapers its quantitative easing and the global financial and currency policies periodically polarize， strengthening the establishment of an Asian bond market and smoothing the flow of cross-border capital has become an increasingly urgent task.endprint

Although China is the worlds most valuable market in the eyes of global fund managers， it has not yet participated in the framework of the ARFP， owing to its implementation of some short-term cross-border cooperation plans， such as mutual recognition of funds between the Chinese mainland and Hong Kong and the interconnection of the Shanghai and Hong Kong stock markets.

In the long run， three conditions should be fulfilled before China opens up its funds market within Asia： first， ordinary investors should feel comfortable investing in both funds and overseas markets； second， savings rates and wealth accumulation should reach a certain quota. Third， Chinas capital market has to be opened up to the outside world. To date， progress has been made on all three fronts.

If the ARFP can be put in place by 2016， China should now make preliminary preparations for its participation， which will grant it a strong voice in the Asian financial market.

To grow into a financial power， China needs to quicken the improvement of its domestic financial， capital and foreign exchange markets， accelerate the liberalization of foreign exchange and capital trading， and take steps to optimize its domestic financial system such as intensifying the flexibility of exchange rates， in order to pursue profits and disperse risks while promoting the integration of Asias financial market.endprint