[ASIA]" Seeking profit and Avoiding harm" will ultimately be the way to make East Asian monetary cooperation work
https://m.thepaper.cn/newsDetail_forward_20577837
Author: Xiong Lan, PhD student, School of International Relations, Peking University
Twenty-five years ago, an Asian financial turmoil brought together 13 countries in ASEAN plus China, Japan and South Korea, resulting in East Asian monetary cooperation and broader regional cooperation; 25 years later, the next financial turmoil seems to be in the making, as the epidemic, the Russia-Ukraine conflict and the Federal Reserve's constant interest rate hikes have led to sharp fluctuations in global exchange rates. The next financial storm seems to be brewing. Jim O'Neill, the leading economist who first proposed the BRICs, said in June this year that a further drop in the yen to 150 yen against the dollar could trigger the turmoil of the 1997 Asian financial crisis. [1] Four months later, O'Neill's warning became a reality. According to Kyodo News, the yen fell below 150 yen against the dollar at one point on 20 October, a nearly 32-year low since August 1990. As winter approaches, when and where will the next financial crisis be triggered? And where will East Asian monetary cooperation go from here?
The signing of the Chiang Mai Initiative is a milestone in East Asian monetary cooperation
Firstly, let us briefly review the history of monetary cooperation in East Asia, represented by the Chiang Mai Initiative. 97 was the year of the Asian financial crisis, which had a severe impact on the economies and finances of the region. When outsiders could not be relied upon, we had to rely on ourselves. After several rounds of negotiations, the 10+3 finance ministers signed the Chiang Mai Initiative (CMI) in Chiang Mai, Thailand, on 4 May 2000, to establish a regional currency swap network. Although the CMI is essentially a bilateral US dollar swap arrangement under the 10+3 framework, it is the first regional financial arrangement agreed in East Asia and has far more symbolic than practical significance. As of June 2007, the 10+3 members had signed 16 bilateral currency swap agreements with a total size of US$80-90 billion.
It is widely believed that the international financial crisis has driven the process of multilateralising the CMI. In May 2007, the 10+3 finance ministers agreed to establish a regional foreign exchange reserve fund as a specific element of the multilateralisation of the CMI (CMIM), with each member setting aside a portion of its own foreign exchange reserves for self-management to help regional countries cope with short-term liquidity difficulties in times of crisis. In 2008, the initial size of the fund was US$80 billion in 2008, expanded to US$120 billion in 2009 and US$240 billion in 2012. In March 2010, when the CMIM was officially implemented, China (including Hong Kong) and Japan each contributed 32%, Korea 16% and ASEAN 20%. In reality, however, the so-called "contribution" is only a financial commitment by the member countries, and the management of the fund remains with each member country. In addition, when the CMI was signed, countries in need of liquidity support were given immediate access to 10% of the bilateral agreement for short-term funding, with the remaining 90% tied to IMF bailout programmes or temporary loans already in place. 2021, the 10+3 Finance Ministers' meeting decided to increase the percentage of decoupling from IMF loans to 40%, and that member countries could contribute in their own currencies.
To support the advancement of the CMIM and to strengthen regional economic monitoring, the ASEAN-China-Japan-Korea Macroeconomic Research Office (AMRO) was established in April 2011 in Singapore as a company limited by guarantee under the Singapore Companies Act. In February 2016, AMRO was upgraded to an international organisation with full legal personality. Its core functions include three areas: 1) conducting macroeconomic surveillance; 2) supporting CMIM implementation; and 3) providing technical assistance to members.
A "mixed blessing" is the fact that CMIM has never been activated until now. "The "good" thing is that after the Asian financial crisis in 1997, the 10+3 countries have increased their foreign exchange reserves and there has not been a serious, systemic financial crisis in the region, so there is no strong incentive for the member countries to activate CMIM. Korea was particularly hard hit by the international financial crisis in 2008, and needed a large amount of short-term liquidity to stabilise the exchange rate of the Korean won and restore market confidence. In the end, Korea chose to sign a bilateral currency swap agreement with the Federal Reserve to obtain US$30 billion in liquidity.
The availability of CMIM has been one of the factors that has prevented East Asian monetary cooperation from going deeper and deeper.
"Divergent views on the future of East Asian monetary cooperation
The East Asian monetary cooperation, marked by the CMI, has endured more than two decades of hardship and has continued to develop without interruption. Now, in the face of complex geopolitical tensions, the lack of a political basis for the region's major powers to work together, and the objective limitations on ASEAN's ability to drive and effectively promote regional monetary cooperation, East Asian monetary cooperation seems to have the tendency to become a "chicken rib", tasteless and discarded. To solve this problem, the most important thing is to clarify the direction of development, and the lack of "unified thinking" is also one of the factors that prevent East Asian monetary cooperation from going deeper and more practical.
As early as 2005, domestic scholars He Fan, Zhang Bin and Zhang Ming put forward proposals for reforming the CMI. [2] Specifically, they included three points. One, the establishment of an intermediary institution to unify the coordination and management of financial resources under the CMI; two, the development of the CMI into a special agreement, in which the funds in the special agreement could be held in trust by the Asian Development Bank, or a separately established intermediary institution responsible for the safety and profitability of the funds; and three, appropriate delinking from the IMF loan program. In retrospect, only point 3 has been adopted so far.
In 2009, Hajime Shinohara, a former full-time director of the Japan International Monetary Institute, wrote an article advocating the promotion of the establishment and development of the Asian Monetary Fund based on the development and change of the CMI, and pointed out the importance of close cooperation between China and Japan. [3] In particular, Hajime Shinohara mentioned the development of a method of calculating the value of national currencies that could move away from the current dollar-centric foreign exchange system, replace the dollar, and study issues such as intra-regional currency units. Clearly, its ideas are rosy, but the reality is skeletal.
This year, Zhu Guangyao, former Vice Minister of Finance of China, pointed out at a seminar reviewing the 25th anniversary of the Asian crisis that the level and efficiency of regional financial cooperation should be further improved, especially the availability of the CMIM. [4] Zhu Guangyao gave 2 points of advice. One, to clarify the cost criteria for the use of loans as soon as possible, which could be based on the level of interest rates for loans with similar functions of the IMF or the International Bank for Reconstruction and Development (IBRD) under the World Bank; second, to pragmatically promote the physical process of CMIM, which specifically includes dividing the foreign exchange reserves into pending and paid-up capital and promoting it in a gradual manner; to promote the physical process of CMIM in steps, first establishing it in the form of a limited company and then upgrading it to an international organization, with AMRO is transformed into its secretariat.
In a similar vein, C. Randall Henning, a leading scholar on international monetary issues, recently published an article with his key recommendations for promoting monetary cooperation in East Asia. [5] Henning says that if the 10+3 countries wish to establish an "Asian Monetary Fund", the regional equivalent of the IMF, they must do at least three things. First, pool the self-managed reserves designated for the CMIM into a common pool and manage them jointly; second, enhance the disclosure of economic and financial information to AMRO so that it can analyse it in real time and develop policy adjustments for countries in crisis; and third, merge AMRO and CMIM into a single institution so that the former can better advise the 10+3 countries on the benefits and conditions attached to the launch of the CMIM. 10+3 countries.
Taking into account the views of the above scholars, the direction of East Asian monetary cooperation is in fact "self-rotation plus public rotation". "Self-rotation" refers to polishing the usability of CMIM and its operational details on the ground, which is the "action" of "knowledge and action"; "public-rotation" is the "knowledge" of "knowledge and action". The current phenomenon of "chicken ribs" is the result of the disconnection between the two and the fact that knowledge and action are not in harmony. In my view, whether the CMIM has been used so far is not the key issue, but more importantly, does the 10+3 really have a sense of belonging to East Asia? Do the common interests outweigh the differences? Do we have to rely on crises to drive cooperation?
The way to success in East Asian monetary cooperation will be to "avoid harm and benefit".
In the 1990s, Li Zehou mentioned the concept of pragmatic reason in his book Pragmatic Reason and the Culture of Joy, which refers to practicality at the empirical level and rationality as the inner logic, judgement and morality of human beings. East Asian countries are generally pragmatic and are strongly influenced by Confucianism, and under the logic of pragmatic reason, 'Seeking profit and avoiding harm' is ultimately the way to achieve monetary cooperation in East Asia. But common sense tells us that there is no perfect solution. Therefore, the 10+3 can only do as much as possible to 'seek the best' and 'avoid the worst' on the issue of monetary cooperation in East Asia.
To put it simply, the best possible 'Seeking profit' is to go with the flow. The trend from globalisation to regionalisation and regionalisation is a major one, and the smart ones usually choose to follow it. Qian Xandan, a professor of history at Peking University and dean of the Regional and Country Studies Institute, has pointed out that the epidemic has impeded the free flow of capital, people and technology, and that the world will move towards regionalisation, i.e. regional structures such as RCEP, the European Union, ASEAN, the African Union and South America. In East Asia, with the exception of Japan, the other 10+2 countries are still in a phase of rapid development, opposing trade protectionism and supporting trade liberalisation in the hope of continuous economic growth and a constant improvement in the living standards of their people. In the current environment, it is clear that the economic growth brought about by the RCEP is far greater than that brought about by the WTO and other trade agreement platforms, so why should the 10+3 not cling to the "thighs" of regional development and contribute to the prosperity of the region?
It is more straightforward to 'avoid harm' where possible, i.e. to move away from external dependence and choose a relatively controllable, predictable and stable international currency as a medium of exchange. Since foreign trade is the main focus, it is important to choose an international currency for transaction valuation and settlement. At present, East Asia is a typical US dollar system, with the US dollar as the main foreign exchange reserve and the US dollar as the main currency for foreign trade. However, in order to stimulate its own economy and control inflation, the US has repeatedly expanded and tapered its balance sheet in defiance of others, and has repeatedly operated between quantitative easing and tightening policies, with the US dollar index constantly fluctuating, stirring up the global financial and foreign exchange markets, which in turn affects the economies and livelihoods of countries. Why can't East Asia have its own medium of exchange? If there are limitations to a single currency, should there not be a serious discussion on the feasibility and applicability of an Asian currency unit? Would it not be more scientific and rational to choose a unit of account with greater stability, at least within the RCEP region, than to rely excessively on the US dollar?
The 25th ASEAN-China-Japan-ROK Leaders' Meeting has recently been held in Cambodia. In the face of the complex international political and economic situation, the 10+3 countries should plan ahead and draw up a timetable and roadmap on the availability of the CMIM and the future of monetary cooperation in East Asia before the next financial storm hits. After all, history has shown that once a crisis breaks out, external help is the "icing on the cake", while internal self-help in the region is the ultimate version of "sending charcoal in the snow".
[1] https://www.bloomberg.com/news/articles/2022-06-09/yen-at-150-may-risk-rerun-of-asia-financial-crisis-o-neill-says
[2] He Fan, Zhang Bin and Zhang Ming, "Assessment of the Chiang Mai Agreement and Suggestions for Reform", International Financial Studies, No. 7, 2005.
[3] Shinohara, Xing: "The Road to Financial Cooperation in East Asia", International Economic Review, No. 3, 2009.
[4]https://m.21jingji.com/article/20220820/herald/8d97e090e57687f35fa72bf2ae955671.html
[5] https://www.eastasiaforum.org/2022/10/06/east-asias-precautionary-financing-fix/