South Korea is key to improving Asia’s financial safety net – The Diplomat
ASEAN, China, Japan and South Korea – collectively ASEAN + 3 – announced earlier this month that they are considering adding local currencies to the regional dollar-denominated currency swap deal. .
While the tongue in the joint statement issued by finance ministers and central bank governors did not specifically list currencies that could be made available alongside the dollar, with the Chinese yuan and Japanese yen widely seen as the most likely candidates. Efforts to that end, however, are likely to be entangled in politics between Beijing and Tokyo, making change difficult despite the economic benefits.
While the South Korean won may not be in contention, Seoul can play a major role in moving these talks forward as it has in the past.
The regional currency exchange agreement has its origins in the aftermath of the Asian financial crisis. Still recovering from the crisis, the ASEAN + 3 countries formed the Chiang Mai Initiative (CMI) – 16 known bilateral swap agreements totaling $ 84 billion – in 2000 to strengthen access to urgency to liquidity. Essentially, the CMI allowed members facing a crisis to borrow dollars – based on the presumption that the dollar is stronger and more stable than local currencies due to its widespread use – from each other to stem the spread of contagion. Yet when the global financial crisis hit in 2007-2008, no country turned to the facility for help, mainly because the fund was too small. Instead, South Korea turned to the US Federal Reserve in 2008 to $ 30 billion bilateral swap agreement, more than double what it could have gotten from the CMI.
To ensure its strength and relevance for the next crisis, member countries have since embarked on improving the CMI. In 2010, they launched CMI Multilateralization (CMIM), which transformed the overlapping series of bilateral swaps into a self-directed pool governed by a single contract. At its inception, CMIM totaled $ 120 billion, but was doubled to $ 240 billion in 2012. Not only was the size of the fund increased, but also the amount each member could borrow without triggering IMF conditionality. . IMF segregated funds increased from 20% of a country’s drawing quota to 30%, creating the ASEAN + 3 Macroeconomic Research Office (AMRO) to take on greater surveillance responsibilities regional economy. In addition to its crisis management function, a line of credit to prevent impending crises was also created in 2014.
As tempting as it may be to frame the addition of local currencies to CMIM as a China-led effort to challenge the dominance of the dollar and promote the yuan is rather the last impetus of members to improve the usefulness of the arrangement. The integration of members’ major currencies will also encourage trade in these currencies, as continued access to a partner’s money is ensured. This serves both to limit currency risk and to protect the region’s economies against external movements. Since the global financial crisis, there has been particular concern about shocks from the United States rippling through the region due to overdependence on the dollar, apparently exacerbated now by the White House’s trade war with China. The fact that South Korea, Japan and the ASEAN countries have all independently expressed an interest in diversifying away from the dollar further challenges the idea that the proposed change at CMIM is a power game of Beijing.
However, power dynamics are still at play, especially between China and Japan. Beijing will undoubtedly seek to promote the yuan through the CMIM in accordance with its larger efforts and Tokyo will want to secure at least an equal if not higher position for the yen on the grounds that its the exchange rate is more liberalized. Finding a solution that the two can adhere to might prove difficult given their rivalry.
Yet despite this competition, the two have been able to cooperate and advance the regional financial safety net over the years. This is partly due to their common interest in ensuring the economic stability of the region, but also to the ability of other ASEAN + 3 countries to facilitate an agreement among themselves, namely South Korea.
Seoul played a key role in formulating and improving the regional currency exchange agreement. This is perhaps most evident in the negotiations to create the CMIM. As Beijing and Tokyo fought for greater voting power in planning the new institution, Seoul broke the deadlock by propose a quota system giving everyone the same voice, which now constitutes the structure of the CMIM.
There are several reasons why South Korea has played a pivotal role in the development of the regional financial safety net. Ramon Pacheco Pardo, Korea Foundation-Free University of Brussels Korea Chair, says Seoul has actively sought to be at the heart of regional financial governance due to the growing importance of financial markets in the national economy, an increasingly active self-perception and role as a middle power, and support for the institutionalization of ASEAN + 3 while the centrality of ASEAN has diminished. Other academics, such as Kaewkamol Pitakdumrongkit of the S. Rajaratnam School of International Studies, also point out that South Korea is considered a impartial actor without the geopolitical aspirations of Japan and China. These factors also place Seoul in a good position to help break out any potential deadlock on the implementation of local currency contributions to CMIM.
This latest proposed upgrade to CMIM will not definitively answer questions about its usability, although it would yield immediate results. In addition to promoting trade in local currencies, it could also help reduce the possibility that bilateral currency exchanges in the region – developed outside of CMIM – undermine regional cooperation. As before, Seoul will play a crucial role in helping its neighbors overcome their differences in order to realize the potential benefits of the changes currently on the negotiating table for regional financial governance.
Kyle Ferrier is Director of Academic Affairs and Research at the Korea Economic Institute of America (KEI) and a contributor to The Diplomat’s Koreas blog.