Renminbi plays bigger role in Asian financial safety net
Significant revisions to Asia’s $ 240 billion regional financial safety net took effect on Wednesday, marking a key step towards financial self-reliance for participating countries using local currencies and less reliance on the US dollar.
China, Japan, South Korea and the 10 member countries of the Association of Southeast Asian Nations (ASEAN) agreed last year to modify the Multilateralization Agreement of the Initiative of Chiang Mai (CMIM). The changes institutionalize the use of members’ local currencies in addition to the US dollar for borrowing in financial emergencies, the People’s Bank of China said in a statement. In addition, the borrowing limits have been raised.
The Covid-19 pandemic has increased the need for international cooperation in the financial field. ASEAN countries China, Japan and South Korea adopted the CMIM amendment at a September 2020 meeting of finance ministers and central bank governors. Faced with the coronavirus crisis and its consequences, strengthening the regional financial safety net is an important complement to the budgetary and monetary support provided by each country, the meeting participants said in a statement.
Following the Asian financial crisis of 1997, Asian countries sought to cooperate to deal with regional short-term liquidity problems. The CMIM has begun as a series of bilateral swap agreements providing access to US dollar liquidity when a member country experiences a financial shock. But to get such liquidity support, member countries first had to negotiate with the International Monetary Fund (IMF), an institution of 190 countries that promotes global financial stability and monetary cooperation. The IMF serves as an emergency lender for member countries under strict conditions.
The reliance on IMF support and the US dollar has had drawbacks, said Barry Eichengreen, professor of economics at the University of California, Berkeley. Previous requirements for financing the crisis reflected a lack of confidence in regional currencies, he said.
Since the Asian financial crisis, CMIM has gone through two major rounds of revisions. After the global financial crisis of 2008, the CMI – as it was then called – created in 2010 a pool of foreign exchange reserves totaling $ 120 billion. The pool was expanded in 2012 to $ 240 billion.
As amended, CMIM increases the amount of non-IMF money that participating countries can borrow to 40% of each member country’s maximum amount of 30%. The limit was initially set at 20% in 2014.
The borrowing limits are set by the CMIM. In the event of a balance of payments or liquidity crisis, a member government may exchange its local currency for US dollars from the CMIM pool. Each country’s borrowing quota is based on its contributions multiplied by a country-specific multiplier.
The entry into force of the amendment less reflects the need to use US dollars for intra-Asian transactions as the Chinese renminbi becomes a more important international currency, Eichengreen said. Now member countries are more confident in the supervision of the CMIM, which reduces the need to rely on the IMF for such functions, he said.
At the operational level, CMIM’s $ 240 billion safety net consists of pledges of $ 192 billion from China, Japan and South Korea, and $ 48 billion from the 10 ASEAN countries. . Liquidity can be provided in local currencies such as the Renminbi or Japanese Yen with the agreement of member countries. The ASEAN countries are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
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