Thursday, March 25, 2010

Chiang Mai

No, I’m not on holiday ;)

The Chiang Mai Initiative Multilateralization (CMIM) came into effect yesterday. This is a pretty momentous occasion, if you’re a believer in regional economic integration a’la the European Union. The original Chiang Mai Initiative was a set of bilateral swap agreements between ASEAN and Japan, China (including Hong Kong), and South Korea that was intended as protection against the kind of speculative currency attacks that levelled the region in 1997-98.

CMIM takes this a step further by pooling the swap arrangements into one big fund, with an initial size of US$120 billion. The way it works is that each country commits to a certain level of US dollars to the fund, which can then be utilized by any of the members in exchange for local currency, up to a predetermined supply. That means that the ASEAN+3 grouping have a collective pool of reserves that can be used in the event of an external liquidity or solvency crisis, effectively raising the international reserves of each member. This is above and beyond the liquidity support available through the IMF or direct from the Federal Reserve – but without the strings attached.

Given the level of reserve accumulation in East Asia in the past decade (an estimated US$4 trillion at the end of 2009) CMIM is more of an insurance policy, but you can never have too much insurance, right? In Malaysia’s case, the amount is US$11.925 billion, or little above 10% of our current reserves.

What’s interesting is that this could be a precursor for a true Asian Monetary Fund along the lines of the IMF, and just like that being currently mooted in Europe to support some of their weaker members. We’ve already taken another step towards monetary integration with the Asian Bond Markets Initiative (ABMI) and the Asian Bond Fund I and II (here and here). Europe’s economic integration was never premeditated – it was a slow evolving process spanning decades that began with an agreement on steel, and then morphed into the Common Market and a Europe-wide monetary system.

East Asia is travelling the same road, though we’ll probably never achieve the level of integration found in Europe. The economic, cultural and political differences, more heterogeneous than in Europe, makes this a much tougher proposition. But travel it we will, and what the destination will be like would be interesting to see.

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