With so much volatility in global markets, ASEAN nations need to improve their multilateral currency swap networks. Will the addition of Yen and Yuan to the CMIM safety pool improve ASEAN’s ability to weather future liquidity crises?
By Preetam Kaushik
Global economies face an uncertain year in 2019. With the ongoing US-China trade war, Brexit impasse, and the general trend towards populism in major nations, there are plenty of things to keep global markets jittery.
The ASEAN region has witnessed relative prosperity in recent years. But it would not take much to nudge the region into a downward spiral. For instance, a Federal Reserve interest rate hike post-2019 could trigger a flight of capital to the west, landing the region in a crunch situation.
The upcoming finance and regional cooperation summits of the ASEAN+3 gain added significance against the backdrop of global uncertainty. The Chinese, who will be chairing the one of the Summits in Fiji (along with Thailand), have made a strong push for the inclusion of Yuan into the existing Chiang Mai Initiative Multilateralization (CMIM). Japan has also inked bilateral currency swap deals with individual nations in the region, signalling a strong interest in adding its own currency to the pool to forge deeper ties in the region and boost trade.
What is the current status of CMIM?
Created as the alternative to the proposed Asian Monetary Fund (which never got of the ground due to IMF opposition), the Chiang Mai initiative has had a long and difficult birthing process.
It took the member states of ASEAN+3 the better part of 15 years to devise a framework for bilateral currency swap agreements, including the arrangement of quotas and individual contributions.
At present, the size of the buffer fund is pegged at US$240 billion, which is held jointly by the members in their central bank reserves. Under the current framework, each member nation can borrow a fixed quota from the fund during liquidity crunches.
The CMIM is linked to the IMF, and member states run the risk of being put under IMF austerity programs if they borrow beyond a fixed percentage of their individual quotas from the fund. This is currently pegged at 30%.
Why Japan and China want in on the currency swap agreement
Though economic superpowers in their own right, neither Japan nor China has had any success in dislodging the hegemony of western currencies in the global markets, especially the US Dollar.
While the Yuan has been growing in stature in recent years, it is still no match for the US Dollar, which accounts for nearly 40% of the global payments in 2018. By comparison, the Yuan, or Renminbi, accounted for just 1.88%.
For China, adding Yuan to the CMIM would further its efforts to spread the influence of its currency on the global scene.
Japan is keen to promote the Yen in Asian markets to reduce the Forex risk faced by its companies. Any company forced to buy foreign currencies from the market becomes vulnerable to the periodic fluctuations in that currency’s valuations.
This is why most firms operating in foreign markets seek out currency swap agreements. The Japanese already use their national currency for 45% of all transactions in the region, but they would benefit from increasing that percentage further
The CMIM requires attention in other areas
For ASEAN nations, there are far more pressing concerns about the CMIM than the inclusion of alternate currencies. The safety net in its current form is inadequate to deal with the pressures of a future financial crisis and liquidity crunch in the region.
Indonesia and South Korea suffered this first hand during the 2008 Financial crisis. Back then, the CMIM was still in its early formative stages. Only the initial Chiang Mai Initiative had been signed, and the fund was still at just US$120 billion, with the IMF delinked segment at 20%.
Though they both could have borrowed from the fund, their individual portions unlinked to the IMF were not enough to stabilise their economies. In order to avoid IMF involvement, Seoul ended up turning to the US Federal Reserve for a multibillion-dollar line of liquidity, while Indonesia sought assistance from the World Bank.
Even though the CMIM amendments have doubled the fund to US$240 billion, and the percentage of each nation’s quota delinked from the IMF have been raised to 30%, those numbers would still be inadequate for most ASEAN nations in the event of a global credit crisis.
For example, Thailand’s quota is around US$22 billion. Once you remove the percentage that would invite IMF austerity measures, its central bank can only withdraw around US$6 billion. In a severe liquidity crisis, that is probably not going to be enough.
The Yen and Yuan can add much needed flexibility
Proposals to add the Yuan and Yen come as part of a wider push to increase the size and autonomy of the CMIM. From the perspective of ASEAN nations, it is largely a win-win situation for them. They already have extensive bilateral currency swap treaties in place with both Japan and China.
Furthermore, both China and Japan already have bilateral currency swap agreements involving both the Yuan and Yen. Their addition to the pool would provide ASEAN nations with more flexibility in the currency markets.
Though it may be the de facto global reserve currency, over-reliance on the US dollar is not a good idea for a key economic bloc like ASEAN in the long run. Alternative arrangements like these that foster regional unity and cooperation are always a welcome addition, especially since they do not represent any rash or a radical departure from the existing systems.