The attached ADB paper says: “The idea of the Asian bond market emerged first from Thailand in the summer of 2002. The creation of a bond market requires both issuers of bonds and investors in those bonds. The Thai initiative focused mainly on the investor side as then-Prime Minister, Thaksin Shinawatra, proposed that the members of ASEAN Plus Three contribute 1% of each country’s respective foreign exchange reserves to launch a regional fund to purchase Asian bonds.”
Taksin’s Asian Bonds is the first step towards a “Mini” Asian IMF, being the so called CMIM. Local press recently report progress on CMIM, but most did not mention Thaksin.
The move aimed to increase the region’s efficacy in financial cooperation to support each country’s cash flow in case there was a sudden short-term shortage of capital in one of the member countries. The CMIM fund was created after the Asian financial crisis in 1997 to increase the region’s financial cooperation. The finance ministers of member countries agreed on the creation of the fund on May 6, 2000, in Chiang Mai. The fund’s head office is in Singapore.
Recently members of Asean+3 and the Hong Kong Monetary Authority have agreed to double the Chiang Mai Initiative Multilateralisation fund to lower the risk of a sudden economic crisis and help prevent spill-over effects of future crises to other countries.
Asean+3, which includes China, Japan and South Korea, and the HKMA – the central bank of Hong Kong – had agreed to increase the CMIM fund from US$120 billion to $240 billion (Bt7.7 trillion), effective last week.
Local press reports the revised CMIM plan has been signed by all member countries but has only recently been signed by Thailand because of the dissolution of Parliament last December. The National Council for Peace and Order now has signed it.
There are 13 member countries in the fund. Before the agreed increase, its total reserve was $120 billion, including $746.5 million (20 per cent) from Asean countries. The contribution from China, Japan and South Korea was $3 billion (80 per cent). Countries that experience a sudden shortage of capital due to a crisis can allocate some of the CMIM fund according to previously agreed ratios.
Several local press reports the increase of the fund size means Thailand will have to provide $9.1 billion instead of $4.5 billion and the amount will be fronted by the BOT’s international reserves. If Thailand experiences a financial crisis and has cash-flow problems in the future, it will be able to receive financial help of 2.5 times its contribution to fund – $22.7 billion.
The revised CMIM plan has been signed by all member countries but has only recently been signed by Thailand because of the dissolution of Parliament last December.
Local reports the Thai junta (National Council for Peace and Order) has now has signed it.
Besides the increase of the fund size, there has also been an increase in the proportion of the fund that is not connected to the International Monetary Fund.
The CMIM fund was created after the Asian financial crisis in 1997 to increase the region’s financial cooperation. The finance ministers of member countries agreed on the creation of the fund on May 6, 2000, in Chiang Mai. The fund’s head office is in Singapore.
There are 13 member countries in the fund. Before yesterday’s agreed increase, its total reserve was $120 billion, including $746.5 million (20 per cent) from Asean countries. The contribution from China, Japan and South Korea was $3 billion (80 per cent).Countries that experience a sudden shortage of capital due to a crisis can allocate some of the CMIM fund according to previously agreed ratios.
The ADB Reports (source)
Regional Economic Institution Building in East Asia
4.1 Regional Financial Cooperation and Institutions
In the aftermath of the Asian financial crisis, efforts to provide an institutional base for regional financial cooperation developed very quickly in East Asia. The experience of the crisis prompted these efforts, which aim to make sure that such a financial disaster will never happen again. Despite all three aspects of regional financial and monetary architecture being essential for securing maximum financial and monetary stability in the region, the emergency liquidity funding arrangement of currency swaps under the Chiang Mai Initiative (CMI) has become the most institutionalized, while the Asian Bond Market Initiative (ABMI) and Asian Bond Fund (ABF) are moving forward slowly and informally. There is currently very little movement in the area of monetary and currency cooperation in the form of an Asian Monetary Union or an Asian Currency Unit (ACU).
Both in terms of chronology and level of institutionalization, the CMI is the most well-established financial initiative in East Asia at the moment. As early as November 1997, the East Asian governments launched a regional framework in the context of Association of Southeast Asian Nations (ASEAN) Plus Three (Japan, PRC, and South Korea (hereafter Korea)) with the hope of dealing with financial emergencies. This framework became the core of the region’s emergency liquidity mechanism consisting of a network of mostly bilateral currency swap arrangements. The ASEAN Plus Three governments arrived at the basic agreement regarding this regional mechanism by May 2002.21 One component of the CMI is the expanded ASEAN Swap Agreement, a small regional currency swap facility that has existed among ASEAN members since 1977. The other, more recent components are the Bilateral Swap Arrangements and the repurchase arrangements between each member of the ASEAN Plus Three.22 The CMI has two basic objectives: the first is to provide emergency liquidity at a time of financial crisis, such as the Asian financial crisis. The second and longer-term goal is to enhance regional cooperation both in terms of currency stabilization and financial monitoring. As of June 2009, US$90 billion worth of swap lines have been committed by the participating monetary authorities.
In May 2009, the decision to multilateralize (i.e., regionalize) the CMI was finalized, and in the near future the funds already committed to bilateral swap lines will be pooled to create a potential for a much larger swap volume per use.23 The newly established CMIM (Chiang Mai Initiative Multilateralized) will consist of a multilateral private swap agreement among the member central banks with a pooled fund of US$120 billion. Through the multilateralization process, not only did the amount available for each swap expand, but it also allowed the ASEAN countries that were not incorporated into either the Bilateral Swap Arrangements or ASEAN Swap Agreement to become full members of the CMI process (namely Brunei Darussalam, Cambodia, Lao People’s Democratic Republic, and Viet Nam). Despite the large amount of available funds and the image of the “revival” of the Asian Monetary Fund (AMF) proposed by the Japanese authority at the onset of the Asian financial crisis in the summer of 1997, there are two features that clearly distinguish the CMIM from the (relatively vaguely defined) AMF.
The first is the fact that the CMI so far has been a virtual institution. The recent agreement will lead the CMIM to establish a more formal institution to engage in the monitoring and surveillance of member countries in preparation for the activation of currency swaps, but it is unlikely that this will turn into a large standing institution, and nor does it consist of an actual pool of funds in the same way that the International Monetary Fund does. The currency swap arrangements are based on a contractual agreement among the central banks to activate those swaps based on their respective foreign exchange reserves as the CMIM receives requests.24 The other feature of the CMIM is the IMF-link as a condition to activate the currency swaps. This 90% link (i.e., 90% of the swap can only be activated when the IMF agreement is either negotiated or in place) was put in place at the establishment of the CMI due to the lack of a monitoring function under the ASEAN Plus Three framework. Without this link, deciding to activate a swap line and guaranteeing repayment becomes difficult.25 The explicit definition of the CMIM as a complementary liquidity funding mechanism within the international framework led by the IMF did not emerge solely from the lessons of the failed AMF,26 it was established to make sure that repayment on the part of borrowers is secured through international pressure. A regional monitoring and surveillance mechanism has also been developed through the search for a way to prevent a financial crisis from occurring, and if it does, the borrowers can be monitored closely. The financial ministries of the member governments have, since the start of the CMI process, worked on those functions in the form of a biannual meeting of the Economic Review and Policy Dialogue, but the CMIM has already promised to develop a more specific surveillance function to allow the advisory panel to activate the swaps.27
The current global financial crisis after the collapse of Lehman Brothers of September 2008 helped the multilateralization of the CMI by making the leading countries compromise on and commit to a common regional goal.28 Despite such regional success, however, the monetary authorities of the countries with large foreign exchange reserves, namely the PRC and Japan, have established their own respective bilateral swap arrangements using their own currency (yuan and yen) besides the CMIM.29
The ABMI, in the context of the ASEAN Plus Three, also directly addresses the regional need for financial stability, a lesson that unmistakably came from the Asian financial crisis. The Asian financial crisis revealed the financial vulnerability of the East Asian economies ranging from domestic financial weakness to an inefficient investment climate. The challenge of the double mismatch problem, which came about as East Asia borrowed short-term in dollars and invested long-term in assets denominated in their local currency, has imposed more costs and risks on the borrowers in East Asia. As a region with relatively high savings, there was an emerging sense that “surplus savings from East Asia [flowing] out of the region to Western financial markets and then return[ing] by way of loans to Asian borrowers…makes little economic sense” (Rowley 2003).
The idea of the Asian bond market emerged first from Thailand in the summer of 2002. The creation of a bond market requires both issuers of bonds and investors in those bonds. The Thai initiative focused mainly on the investor side as then-Prime Minister, Thaksin Shinawatra, proposed that the members of ASEAN Plus Three contribute 1% of each country’s respective foreign exchange reserves to launch a regional fund to purchase Asian bonds. The idea, which was discussed at the East Asia Economic Summit in Kuala Lumpur in October 2002, was developed and adopted by the Executives’ Meeting of East Asia Pacific Central Banks as they set up the ABF, which was formally announced in June of 2003. As the central banks of eleven Asia-Pacific countries (including Australia and New Zealand) pledged US$1 billion for the purchase of semi-sovereign and sovereign bonds from less advanced countries (i.e., not Japan, Australia, or New Zealand) in the region. At this stage, the bonds that this fund had purchased were all US dollar-denominated. In June 2005, however, as the second phase of the Asian Bond Fund (ABF2) was launched, the fund used US$2 billion to invest in bonds denominated in Asian currencies.30
On the other hand, the Japanese government from the early stage of the Asian bond discussion was interested in developing a regional and local bond market in East Asia with the focus on the issuers. As early as the time of the New Miyazawa Initiative (October 1998), the Ministry of Finance (MOF) was interested in supporting local bond market development to tap into local savings and avoid a heavy reliance on foreign capital. In December 2002, Japan officially proposed the idea of the ABMI at an ASEAN Plus Three meeting in Thailand. The aims of the ABMI are two-fold: to facilitate access to the market through a wider variety of issuers, and to enhance market infrastructure to foster bond markets in Asia (Ministry of Finance).31 Under this initiative, the Japan Bank for International Cooperation extends bond guarantees to local-currency denominated bonds. Six working groups under the ABMI umbrella are working to establish a market infrastructure including a regional bond-rating system.32 The Japanese government also extends technical assistance in the development of a local bond market in some ASEAN countries utilizing Japanese foreign aid. Furthermore, the new ABMI Roadmap, which includes an insurance mechanism, the facility to increase the demand of local currency-denominated bonds, an improved regulatory framework, and a related infrastructure for the bond markets, was endorsed at the 2008 Madrid meeting.
The currency and exchange rate arrangement (the other element of the double mismatch) constitutes the last necessary component of East Asia’s regional financial cooperation.
Because of high and increasing regional economic interdependence in the mid-1980s, the dollar–yen exchange rate volatility (e.g., the depreciation of the yen to the US dollar after the spring of 1995) also put pressure on many Asian economies in the 1990s. After the de-pegging of the baht in the summer of 1997, some East Asian countries, most of whose currencies used to be pegged one way or another to the US dollar, floated their currencies. Being highly dependent on their investment and trade, the East Asian governments were eager to see their exchange rates stabilize (Kuroda and Kawai 2004). As Japan’s first efforts to increase the use of the yen in the region did not bear much fruit, East Asia has gradually started to entertain the possibility of regional monetary cooperation, even of a monetary union.
As the first step towards the Asian Monetary Union, economists and policymakers in East Asia conducted a joint study with the European Union (the Kobe Research Group) that published its report in July of 2002 and recommended a monetary integration process for phase one (to be completed by 2010); preparation for a single currency for phase two (to be completed by 2030); and the launching of a single currency in phase three that would start in 2030 (Institute for International Monetary Affairs 2004). The second and most current initiative is related to the idea of the ACU, initially discussed in late 2005 by the newly expanded Office of Regional Economic Integration at the Asian Development Bank under the leadership of its then-director Masahiro Kawai, and the new Asian Development Bank president Haruhiko Kuroda. The proposed ACU models itself after the European Currency Unit that existed as the region’s currency unit before the introduction of the euro. The European Currency Unit constituted a unit of exchange based on the weighted average of values of a basket of currencies. The ACU idea was picked up by the ASEAN Plus Three at the finance ministers’ meeting in May 2006, where all thirteen participating governments agreed to conduct in-depth research on its feasibility.33 One thing to note here, however, is that monetary cooperation at this stage has not given rise to discussion on convergence criteria or explicit macroeconomic policy coordination, which would be necessary in managing the stable exchange rates among the countries whose capital movement is relatively free (i.e., Mundell-Fleming Condition or Unholy Trinity).34 Moreover, despite the concerns over global imbalance and the high dollar-dependence of East Asia, the currency discussion in the region has not yet converged into concrete actions.
Regional financial and monetary cooperation in the last ten years has established a relatively clear membership. Given the experience of the Asian financial crisis, the question of who is in and who is out is easily answered. In this context, regional cooperation includes a mechanism to protect vulnerable countries with relatively low foreign currency reserves and financial capacity to acquire access to emergency liquidity funding and technical assistance in developing their financial markets. Meanwhile, as seen in the progress within the three areas of financial and monetary cooperation, there is still strong resistance against a country compromising its policy autonomy. The regional currency discussion, though fundamental in addressing the dollar dependence and ultimate stability in regional financial affairs, is progressing very slowly and, at this point, quite superficially without much commitment from the monetary authorities of the region. Furthermore, the protection of sovereignty over monetary affairs is strikingly clear even in how the CMIM is set up differently from the envisioned AMF.35