Sept. 12 (Bloomberg) -- Asia needs to create more regional bond funds to tap its high savings and fund economic development, Malaysia's Second Finance Minister Nor Mohamed Yakcop said.

A bigger and deeper regional bond market and integration of the region's financial systems must be achieved before countries can consider forming a single Asian currency, he said.

``To have a bond fund mechanism which can be utilized to fruitfully and constructively develop this region, particularly for infrastructure, would be a very good idea,'' Nor said in an interview. ``I certainly think there is a need for one or more bond funds because our savings rate is very high.''

The region's central banks have set up two bond funds since June 2003, aiming to prevent a repeat of the financial crisis of 1997-1998 by providing an alternative source of credit and lure individual investors to Asian securities. Borrowers had used short-term loans from banks to fund long-term investments, which contributed to the Asian crisis, Nor said.

``The Asian bond funds are paving the way for broader investor participation in the region's domestic bond markets,'' said Surinder Kathpalia, Standard & Poor's Singapore-based managing director. ``They are having a positive impact on the development of the region's capital markets and in removing some of the impediments that have so far hindered the development of vibrant domestic bond markets in the region.''

Asian finance ministers and central bank chiefs will likely discuss setting up more regional bond funds when they meet at the annual gathering of the World Bank and International Monetary Fund starting in Singapore this week, Nor said.

Bond Funds

The first Asian Bond Fund of $1 billion was started in June 2003 by a group of 11 Asia-Pacific central banks to invest in dollar-denominated government debt and state-backed securities. They set up a second fund in December 2004 to invest $2 billion in similar securities denominated in local currencies.

The group includes central banks and monetary authorities of Australia, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore and Thailand.

Asian central banks may start a third bond fund, Joseph Yam, chief executive of the Hong Kong Monetary Authority, said in November. It may include bonds backed by credit enhancements or guarantees, and asset-backed bonds such as those securitized by home mortgages, Yam said, without indicating when it would start.

``Going forward, we need to have a stronger bond market,'' Nor said. ``The banking system lends for short term and cannot be used to fund projects which have got long-term gestation period,'' such as power projects and toll roads, he said.

Savings, Reserves

Savings rates in Asia range from 20 percent to 40 percent, and Asian central banks are among the biggest investors in U.S. debt securities, the minister said.

Foreign reserves of 14 Asia Pacific central banks, including Taiwan, India and Cambodia, amount to about $2.96 trillion, or 65 percent of the world total, according to Bloomberg data.

``Why not use the funds for developing our own region, and there is certainly much scope to optimize on the usage of this high savings rate and high foreign exchange'' reserves, Nor said.

Building more regional bond funds will help countries bring about closer integration of their financial systems, which is a prerequisite for creating a single currency, he said.

``As we integrate our financial system, as we bring more and more players together, as we understand each other better, issues related to the single currency could come on the table at least for discussion,'' the minister said.

The 10-member Association of Southeast Asian Nations, China, Japan and South Korea said in May they'll study the creation of an index of the region's currencies that could be a precursor to a common exchange unit. The Asian Development Bank in March said it was developing such an index, called the Asian Currency Unit.

The idea of a single currency for Asia and of integrating the region's economies came about after the financial crisis and has been backed by ADB President Haruhiko Kuroda.

A single currency ``is not on the table yet,'' Nor said. ``It is too early in the day to think of that.''

To contact the reporter on this story: Stephanie Phang in Kuala Lumpur at sphang@bloomberg.net

Last Updated: September 11, 2006 23:40 EDT