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The Future of the Chiang Mai Initiative: an Asian Monetary Fund?

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The Future of the Chiang Mai Initiative: an Asian Monetary Fund? Policy Brief N U M B E R P B 0 9 - 5 FEBRUARY 2009 arrangements (BSAs) dubbed the Chiang Mai Initiative (CMI) The Future of the Chiang Mai and are negotiating among themselves to build these BSAs into a more comprehensive facility. Some Asian officials hope that Initiative: An Asian Monetary such a facility could underpin exchange rate cooperation and monetary integration in the region, although such proposals remain for the moment long-term visions. Fund? The present financial crisis raises the prospect that some governments might draw on their BSAs under the CMI and C. Randall Henning increases the stakes in the CMI’s possible future development into a comprehensive facility. This juncture thus represents a C. Randall Henning, visiting fellow, has been associated with the Peterson moment of truth for East Asia: Are these governments serious Institute since 1986. He serves on the faculty of the School of International about financial cooperation? Can they overcome rivalries and Service, American University. He specializes in the politics and institutions make the difficult political decisions to advance it? Will they of international economic relations, international and comparative political adhere to or break from international financial institutions such economy, and regional integration. He is the author of Accountability and Oversight of US Exchange Rate Policy (2008), East Asian Financial as the IMF? Cooperation (2002), The Exchange Stabilization Fund: Slush Money Senior officials of East Asian governments and central banks or War Chest? (1999), Cooperating with Europe’s Monetary Union will meet three times between February and May 2009 to consid- (1997), Currencies and Politics in the United States, Germany, and er, among other things, transforming the CMI from a network of Japan (1994) and recent journal articles on exchange rate policymaking in BSAs into a collectively managed fund. These meetings take place the euro area; coauthor of Transatlantic Perspectives on the Euro (2000), Global Economic Leadership and the Group of Seven (1996) with C. under the aegis of ASEAN+3, the ten members of the Association 1 Fred Bergsten, Can Nations Agree? Issues in International Economic of Southeast Asian Nations plus China, Japan, and South Korea. Cooperation (1989) and Dollar Politics: Exchange Rate Policymaking in Their 13 finance ministers will meet on February 22 prior to a the United States (1989); and coeditor of Governing the World’s Money meeting of the ASEAN heads of government beginning Febru- (2002). He has testified to several congressional committees and served as ary 27 in Thailand. The finance ministers will then meet again the European Community Studies Association Distinguished Scholar. He gratefully acknowledges the superb research assistance of Marko Klasnja and in Bali, Indonesia, in early May. The three meetings straddle the helpful comments by C. Fred Bergsten on this policy brief. next summit of the Group of Twenty (G-20) in London in early April. An ASEAN+3 agreement to create a common regional fund © Peter G. Peterson Institute for International Economics. All rights reserved. would realize some, though not all, of the features of the original Asian Monetary Fund proposal and significantly alter the global In September 1997, at the outset of the last global financial financial architecture. Whether the 13 governments are willing to crisis, the Japanese Ministry of Finance proposed the creation of cross that threshold, however, remains to be seen. an Asian Monetary Fund. Although this particular proposal was This policy brief (1) provides a brief primer on the CMI, scuttled, the idea of a common regional fund on which East Asian (2) reviews the issues under discussion for its conversion into governments might draw in times of financial turmoil survives. a common regional fund, and (3) offers recommendations to The region’s disaffection from the International Monetary Fund governments in East Asia and the rest of the world to enhance (IMF), stemming from the 1997–98 crisis, sustains this idea and complementarity between financial regionalism and global insti- a desire on the part of individual countries to self-insure with tutions such as the IMF. large holdings of foreign exchange reserves. East Asian govern- ments and central banks have created a set of bilateral swap 1. The 10 ASEAN members are Brunei, Cambodia, Indonesia, Laos, Malaysia, Burma/Myanmar, the Philippines, Singapore, Thailand, and Vietnam. 1750 Massachusetts Avenue, NW Washington, DC 20036 Tel 202.328.9000 Fax 202.659.3225 www.petersoninstitute.org N U M B E R P B 0 9 - 5 FEBRUARY 2 0 0 9 Reviewing the CMI and possibilities for its regionaliza- Philippines, Thailand, and South Korea.4 Because they can be tion is all the more timely in light of a notable increase in the renewed up to seven times, these (three-month) “swaps” can number and relevance of other regional and bilateral financial provide not only short-term liquidity but also medium-term arrangements. At the outset of their recent crises, for example, balance-of-payments financing. Iceland and Pakistan each appealed to reserve-rich countries in The amounts that individual countries can access under an unsuccessful effort to avoid resorting to the IMF. The Euro- these arrangements depend on the specific BSAs in place with pean Union provided large shares of the financial packages for Japan, China, and South Korea. In principle, Indonesia can Hungary and Latvia. Russia has announced modest support borrow $12 billion, Thailand and the Philippines $9 billion for regional neighbors, and Ukrainian officials have asked each, and Malaysia $6.5 billion under their arrangements Moscow to consider a large loan. In addition, since December with the three creditors. Prior to recent agreements (discussed 2007, the US Federal Reserve has opened swap agreements below) South Korea could borrow from both its Northeast with 14 central banks including several in East Asia.2 While Asian partners, Japan and China, as well as from Southeast these arrangements have so far avoided colliding with one Asian countries, with whom it has two-way arrangements, for another and with the IMF, the potential for conflict rises a grand total of $23 billion.5 with the number and diversity of alternative financial facili- These amounts must be qualified by three observations, ties. The international community must address the respective however, two of which suggest more limited access and one roles of bilateral and regional facilities and global financial that suggests greater access. First, the 16 BSAs have specified institutions, notably the IMF, and coordination among them terms and, therefore, will be in various states of expiration, (Henning 2002, 2008). renegotiation, and renewal at any one time. Second, under the BSAs, activation is not automatic on the request of the borrower. Activation also requires approval by the creditor, THE CHIANG MAI INITIATIVE which, while perhaps expected, is not guaranteed and hinges critically on decisions of the IMF (discussed below). Third, The CMI was launched at a meeting of ASEAN+3 finance the amounts, while modest, can nonetheless be raised rela- ministers in Thailand in May 2000. They announced a broad tively quickly in a crisis. While raising amounts available is not set of objectives for financial cooperation, involving policy trivial, this particular matter can sometimes be renegotiated dialogue, monitoring of capital flows, and reform of interna- more easily once an agreement is in place than negotiating an tional financial institutions. The finance ministers would also entirely new agreement. later add bond-market initiatives and regional bond funds to Recently, East Asian central banks have announced several their agenda for regional cooperation. But at Chiang Mai their new swap agreements outside the ambit of the CMI. In Decem- core objective was to establish a network of BSAs between ber 2008 the three countries in Northeast Asia announced (a) Northeast and Southeast Asian members. As these BSAs were an increase in the size of one of the Japan-Korea swaps from negotiated and concluded over the subsequent years, their the equivalent of $3 billion to the equivalent of $20 billion and number grew to 16—although the number in effect at any one (b) the establishment of a new China-Korea swap equivalent to time varies, as these arrangements lapse and are renegotiated roughly $26 billion. In concluding these agreements, Japanese and reinstated.3 ASEAN+3 finance ministers reviewed the CMI and Chinese officials appeared to be responding to the exten- in 2004–05 and launched a “stage two,” roughly doubling the sion of a $30 billion swap agreement to Korea by the US Federal nominal size of the swaps among other things. Asian officials Reserve.6 China subsequently also extended two local-currency now place the total amount that can be mobilized under these BSAs at $83 billion. Eliminating double-counting and remov- 4. The development of the CMI and associated policy issues are debated in ing arrangements that have mostly symbolic value, however, Henning (2002, 2006), Eichengreen (2002), Bergsten and Park (2002), de reduces the total to $50 billion to $60 billion. These arrange- Brouwer (2004), Kuroda and Kawai (2004), Rajan and Sirigar (2004), Amyx (2005, 2008), Grimes (2006, 2009), among others. ments nonetheless potentially mobilize funds that represent a multiple of the IMF quotas for Indonesia, Malaysia, the 5. See, for example, Kawai and Houser (2007) and the frequently cited diagram at the website of the Japanese Ministry of Finance, www.mof.go.jp/ english/if/cmi_0707.pdf. 6. Bank of Japan, “The Bank of Japan and the Bank of Korea Announce an Increase in the Size of the Yen-Won Swap Arrangement” December 12, 2008, 2. The Fed also maintains long-standing swap agreements with the Bank of available at www.boj.or.jp; People’s Bank of China, “The People’s Bank of Canada and Bank of Mexico.
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