Asian finance ministers kick-start currency scheme

03/05/2010 | Anthony Rowley

Finance ministers from China, Japan, South Korea and the ten Asean states, agreed on Sunday to moves that will make their $120 billion multilateral currency swap mechanism operational

Finance ministers from China, Japan, South Korea and the ten Asean states, yesterday agreed to moves that will make their $120 billion multilateral currency swap mechanism operational.

More than ten years after the system was first established, the finance ministers agreed to set up an Asean+3 Macroeconomic Research Office (Amro) in Singapore to provide monitoring and analysis of regional economies to the Chiang Mai Initiative Multilateralized (CMIM). This has been the missing link in the CMIM process up to now.

“This is an important step in the implementation of the CMIM,” said China’s finance minister Xie Xuren who co-chaired yesterday’s talks, held on the sidelines of the ADB annual meeting,

The move comes at a time of global financial turbulence caused by the Greek crisis, and is seen as timely because of the risks of contagion spreading from the eurozone to Asia and elsewhere.

A network of bilateral currency swaps known originally as the Chiang Mai Initiative (CMI) was agreed on by the Asean+3 ministers in 1999, two years after Asia was plunged into a currency crisis, as a buffer against future shocks.

It was “multilateralized” two years ago, and became a centrally-operated pool of regional currencies. But it could not operate without an economic surveillance function, which it will now have through the Amro.

Thai finance minister Korn Chatikavanij told Emerging Markets that Asia is now

“relatively well insulated” from concerns about the stability of the recovery in the eurozone. He pointed to the CMIM as a measure that would have helped resolve the deadlock in Europe over a bailout for Greece.

“If a crisis was to occur, we wouldn’t need to go through the long and arduous process that the eurozone has been going through, in order to find a solution,” Korn said.

The 13 ministers warned meanwhile that, despite the strong rebound in Asian economies, “downside risks to the overall global economic recovery” remain.

“Ample liquidity in the global market [is] driving up asset prices and increasing inflationary pressures”, they noted. Sovereign debt risks have precipitated renewed global risk and triggered “destabilising international capital flows into Asia,” they said.

The activation of Amro was viewed as a major achievement, Xie indicated. This will enable the CMIM to begin its core functions of “addressing balance of payments and short-term liquidity difficulties in the region.”

Supplementing the work of existing financial institutions such as the IMF, the CMIM is a “multilateral currency swap arrangement which covers all Asean+3 members”, they said.

Establishment of Amro in Singapore will meanwhile “contribute to the early detection of risks, swift implementation of remedial actions and effective decision making of the CMIM”, the ministers said in their post-meeting communique. The unit is expected to begin operations early next year.

The ministers also announced the setting up of a $700 million Credit Guarantee and Investment Facility (CGIF) to support development of local-currency bond markets in Asia, and they established a task force to identify future “priority areas of financial cooperation” in Asia.

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