Japan, China as anchors of financial stability
TOKYO - A decade after the devastating financial crisis that swept through Asia, 13 regional economies have agreed on an ambitious plan to launch a multilateral currency-swap scheme by pooling funds from the region's vast foreign-exchange reserves to weather similar upheavals in the future.
The agreement was reached on Saturday in Kyoto at a meeting of finance chiefs from the 10-member Association of Southeast Asian Nations (ASEAN), Japan, China and South Korea, or ASEAN Plus Three as the nations are collectively referred to. ASEAN groups Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
Although the details of the multilateral currency-swap scheme, including how much each country will contribute, have yet to be worked out, it is expected in effect to give Japan and China - the two Asian giants with gargantuan foreign-exchange reserves - the role of anchor for regional financial stability.
Foreign-exchange reserves have more than doubled in many Asian countries since the financial turmoil a decade ago. At present, the region has about $3 trillion in forex reserves, or roughly two-thirds of the world's total. Japan and China are by far the largest holders of reserves, together accounting for about $2.1 trillion. China surpassed Japan as the world's largest holder of reserves in February last year. China's success as an exporter has given it a huge trade surplus - and forex reserves of $1.2 trillion. Japan has reserves of $900 billion.
The ASEAN Plus Three currency-swap agreement is also seen by some observers as a move that could lead to the creation of an Asian Monetary Fund, an Asian version of the International Monetary Fund (IMF), which is led by Western nations. During the 1997-98 Asian financial crisis, Japan proposed the creation of such a monetary fund, but the initiative was quashed because of fierce objections from the United States and China.
The meeting of the ASEAN Plus Three finance chiefs, the 10th of its kind, was held on the sidelines of a two-day annual general meeting of the Asian Development Bank (ADB), which ended on Monday evening.
Japanese Finance Minister Koji Omi, who chaired the ADB powwow, announced a plan on Sunday to contribute $100 million to the Manila-based international lending organization to set up two new funds to fight global warming and facilitate the investment climate in the Asia-Pacific region. The proposed funds - the Asian Clean Energy Fund and the Investment Climate Facilitation Fund - are key pillars of Japan's new initiative dubbed Enhanced Sustainable Development for Asia.
Omi also announced that Tokyo will extend low-interest yen loans worth up to $2 billion over the next five years through the government-affiliated Japan Bank for International Cooperation (JBIC) in the areas of investment and climate change under joint programs with the ADB.
The Kyoto Protocol on curbing global warming, which took effect in February 2005, was adopted in late 1997 at the Third Conference of Parties to the United Nations Framework Convention on Climate Change, or COP3 as the meeting is commonly remembered, held in the ancient Japanese capital.
From bilateral to multilateral
The ASEAN Plus Three finance ministers agreed to transform the current regional network of bilateral currency swaps into a multilateral framework. The network of bilateral swap arrangements is now worth $80 billion, consisting of 16 bilateral arrangements among eight countries. The finance chiefs also agreed on the importance of strengthening regional surveillance as part of efforts to make the multilateral currency-swap framework effective.
"Proceeding with a step-by-step approach, we unanimously agreed in principle that a self-managed reserve pooling arrangement governed by a single contractual arrangement is an appropriate form of multilateralization," the ministers said in a joint statement issued after their one-day meeting. "We recognize the consensus reached as a significant achievement toward an advanced framework of regional liquidity support mechanism."
The current web of bilateral currency-swap deals, known as the Chiang Mai Initiative (CMI), was introduced in May 2000 to prevent a recurrence of the 1997-98 Asian financial meltdown, which originated in Thailand, spread to Indonesia and South Korea, and affected most other regional economies.
Still, bilateral arrangements would take time to work because a country whose currency comes under attack would need to request assistance from each partner country. The 13 Asian nations have concluded that a multilateral framework would serve as a more timely safety net in case of a crisis because a country could obtain rescue funds from partner nations on a single request and use them to counter speculative attacks on their currencies.
The 13 Asian finance chiefs, striking an upbeat note, affirmed that the regional economy remains in good shape and on a growth path despite recent global stock falls stemming from plunges in the Shanghai market in late February. "We welcomed continued strong growth of the regional economy," the joint statement said. "The growth outlook for 2007 remains favorable and the external environment is broadly supportive of regional economic expansion."
At the same time, the joint statement noted "challenges posed by main downside risk factors, including possible spillover effects from potential slowdown in major world economies, large global imbalances, greater financial market volatilities, growing signs of a rise in protectionist sentiment and a recurrent rise in oil prices".
To be sure, few expect an imminent recurrence of the 1997-98 crisis. But what happened 10 years ago is still bitterly remembered by many in the region. The joint statement also noted, "We recognized the increased globalization of economies and agreed on the importance of policies that strengthen the region's resilience.
"In this context, we reiterated our commitment to accelerate and deepen structural reforms and implement appropriate macroeconomic policies including domestic demand-driven measures to support sustainable economic growth of the region."
Thai Finance Minister Chalongphob Sussangkarn was particularly vigilant. "The risk factors that we face today are not any less than they were 10 years ago," said the minister, who co-chaired the ASEAN Plus Three gathering with his Chinese counterpart. "The volatility of capital flow, the size of capital flows are even bigger," he said. "This is why we feel we need a regional approach to deal with this problem."
The multilateral currency-swap scheme would allow Asian countries first to try countering a local crisis before resorting to outside help, especially from the Washington-based IMF. Thailand, Indonesia and South Korea - three nations hardest hit by the financial crisis - were forced to turn to the IMF for more than $100 billion in loans to shore up their finances.
Asian governments want to avoid relying on the IMF, which forced them to adopt harsh economic policies, including raising interest rates and cutting public spending, in return for bailouts during the crisis. Still, even the Chiang Mai Initiative is not completely free from IMF supervision.
In fact, the initiative has been confined to a complementary role to the IMF. At present, only 20% of bilateral swap lines under the initiative can be activated independently. The remaining 80% can be disbursed only when a country in trouble agrees to an IMF program. The independent ratio was originally set at 10%. The condition was designed to deter countries from following lax economic policies.
The ASEAN Plus Three finance chiefs' joint statement also noted the complementary role of the new multilateral scheme vis-a-vis the IMF. "We reiterated our commitment to maintain the two core objectives of the CMI ... to address short-term liquidity difficulties in the region and to supplement the existing international financial arrangements."
The Asian financial chiefs also discussed ways to foster an efficient and more liquid bond market in Asia, with the aim of better utilizing relatively high levels of private-sector savings in the region for infrastructure and other investments within the region. In their joint statement, they said they "welcomed the diversification of issuers and types of local currency-denominated bonds" under the Asian Bond Markets Initiative, launched in August 2003.
Heavy reliance on the borrowing of short-term funds from abroad, especially those denominated in US dollars, for long-term investments, was blamed by many economists as a primary structural problem behind the Asian crisis.
Asian Monetary Fund?
Minister Omi emphasized the significance of the ASEAN Plus Three agreement to launch a multilateral currency-swap scheme. "I understand this is very big progress, and it is a major achievement that all 13 nations reached an agreement on the matter," Omi said, adding that Japan will engage in the new currency-swap framework in a proactive manner.
However, the 13 nations have yet to work out details, including how much each country will contribute, who will manage the scheme and when the new system will start. The Asian finance ministers' joint statement said, "We instructed the deputies to carry out further in-depth studies on the key elements of the multilateralization of the CMI, including surveillance, reserve eligibility, size of commitment, borrowing quota and activation mechanism."
Chalongphob said he hopes that "within a couple of years a concrete conclusion will be reached." There is speculation that the size of the multilateral scheme will be about $80 billion, the same amount as the current network of bilateral arrangements. As for the question of who will manage the scheme, the ADB is tipped to be a leading potential candidate among other international institutions.
Despite optimism shown by the 13 Asian financial leaders, there appear to be a number of potential obstacles to actually activating the multilateral scheme, which is still on the drawing board. Aside from technical issues that might arise in the process of fleshing out the scheme, politics could stand in the way of the new Asian initiative.
The agreement to launch a multilateral scheme could alarm the US because it is seen by some as a move that could lead to the creation of an Asian Monetary Fund. In addition, the scheme could be hampered by the increasing rivalry between Japan and China over the leadership role in regional economic cooperation.
The United States, which firmly believes it has ensured peace and prosperity in the Asia-Pacific region and has huge economic as well as security interests here, would oppose any new move based on Asianism to exclude the US. Japan would feel it politically difficult to push for any regional framework vehemently opposed by the US.
In the early 1990s, the US objected - and successfully killed - the East Asia Economic Caucus (EAEC), a grouping of Asian nations proposed by then Malaysian prime minister Mahathir Mohamad and called by some wags a "caucus without Caucasians". The EAEC proposal failed to materialize after Tokyo balked at throwing its support behind the Malaysian initiative, out of political consideration to Washington. More recently, the Japanese initiative for the Asian Monetary Fund, unveiled during the 1997-98 crisis, was aborted because of strong objections from the US - and also from China.
The EAEC proposal may have been killed, at least nominally. But practically it has been resuscitated with a new name - ASEAN Plus Three. As a grouping, the 13 nations began the process of boosting cooperation, especially in the currency and finance areas, in the wake of what they perceived as a slow and lukewarm US response to the 1997-98 Asian crisis.
The US is also wary of growing moves among Asian nations toward greater economic integration. Japan and China are pushing competing ideas for a regionwide free-trade agreement . In 2004, China proposed an East Asian FTA among the ASEAN Plus Three nations. As a counterproposal aimed at diluting China's regional influence, Japan last summer proposed an East Asian agreement that would also include Australia, New Zealand and India.
After the Japanese proposal, the US administration of President George W Bush threw its hat into the ring in the race for regional economic integration by floating the idea of creating a much wider, Pacific Rim FTA that included the US, utilizing the 21-member Asia-Pacific Economic Cooperation (APEC) forum.
China joined the US in opposing the Japanese-proposed Asian Monetary Fund in the late 1990s, fearing Japan's greater clout in the region. But China seems to have become rather enthusiastic about discussing the proposal in recent years.
Some analysts say that if the multilateral currency-swap scheme actually gets up and running, China, now the world's largest holder of foreign-exchange reserves, might take a greater leadership role than Japan in its management, a prospect Tokyo probably would not want to become a reality.
Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economy. Masaki's e-mail address is [email protected].
Hisane Masaki is WSN Editor Japan.