Friday, April 13, 2012

The Limits of ASEAN+3 Financial Cooperation

In the past week there were two notable comments on the ASEAN+3  (ASEAN plus China, Japan and Korea) initiatives in regional financial policy. 

First, in last week’s Economist, the Banyan columnist reviewed the Chiang Mai Initiative Multilateralism (CMIM) and its limitations:

The first go at co-operation, the Chiang Mai Initiative of 2000, was to expand and formalise a network of bilateral swap agreements between central banks, under which they promised to provide each other with liquidity. This was accompanied by a “dialogue” on economic policy, which, as one participant puts it, amounted at best to no more than information-sharing, at worst to a “beauty contest”, with a lot of cosmetic data-enhancement.

In 2010 the 13 countries “multilateralised” the CMI, ie, turned it into a formal arrangement binding them all. Because the money remains in the individual central banks, the CMIM is a set of promises not a fund.

(emphasis added) Indeed, the absence of formal legal structure in the CMI is a fundamental problem that the ASEAN+3 nations are attempting to address.  The Economist goes on to note that that even the increased funding of US$ 240 billion would be insufficient in a future emergency:

Each CMIM country has access to the amount it has committed times a multiple (five for poor countries, 2.5 for the better-off ASEAN members, one for South Korea and 0.5 for China and Japan).  So for Thailand and Indonesia, for example, $11.4 billion is available. Compare that with their respective bail-outs in 1997 and 1998 of $17.2 billion and $42.3 billion (equivalent, in 2012 dollars, to $24.4 billion and $59.1 billion). Or compare it with Europe’s bail-out funds, worth several hundred billion dollars and still criticised for being too small.

The Economist goes on to note that the CMIM, intended as a substitute for the International Monetary Fund (IMF), itself imposes IMF-related restrictions on its use:

Unless a country subjects itself to an IMF programme, it may draw on only 20% of the available liquidity from other central banks. The proportion will be increased, but only to 30% this year and 40% from 2014. Countries that see themselves as potential crisis-victims want to shake off the fund’s shackles. Potential creditors find them rather comforting.

The International Financing Review (IFR) has its own criticism of another ASEAN+3 financial initiative, this time the ASEAN+3 Bond Market Guide:

I’m reminded of those B-movies that kick off with a shot of the protagonist – in this case, he’s at the launch of the Asian Bond Markets Initiative back in 2003 (yes, that long ago), when APT finance ministers came up with a plan to recycle Asia’s hefty savings in Asia rather than in the West through the development of efficient and liquid bond markets.  Next, our hero goes into an unexplained coma and, then, miraculously wakes up nine years later to complete the guide he had been working on, as if nothing has happened in the interim.  That’s not far from the truth, because really nothing much has happened since then.

The IFR then goes on to note why the Guide will be helpful but does not represent a major advance in regional financial cooperation:

Although it is a very useful reference, I doubt the guide will change anything in and of itself. It covers (in detail) market infrastructure; transaction flows, settlement cycles, and numbering; as well as information about the regulatory framework and market practices in 11 jurisdictions. It’s all very worthy. It’s also, in some respects, 1,532 pages of “So what?”

The [ASEAN+3 Bond Market Forum] wants the guide to increase investor understanding of regional bond markets, and reckons it will assist in setting up the Asian Multi-currency Bond Issuance Programme, which it hopes to introduce before the end of 2013, including possible pilot bond issuance. Hmmm. Let’s wait and see.

Finally, the IFR concludes that politics is the real reason for a lack of movement in financial cooperation:

This is first and foremost a political project. Individual jurisdictions need to accept that ironing out regional funding imbalances means that surplus nations will lose some of their savings to deficit nations. That’s the point of a community. Also, the project needs to be endorsed not just via pan-regional communiqu├ęs at the political level, but by action.

I would agree.  In fact, the relatively limited scope of the CMIM described by The Economist is also due to a lack of political will within the ASEAN+3 nations.   Expanded development of both initiatives would require much greater regional harmonization of regulations, and perhaps even a supranational authority to administer or regulate them. The former is difficult in the region, and the latter is a non-starter in Asian capitals.

Yet the political will can be found, if the right conditions exist.  The problem is that current conditions aren’t right.  Asia looks with deep skepticism at the prime example of regional financial governance, the EU, with its problems partially brought about by the defects in Europe’s own financial system. As ASEAN Secretary-General Surin Pitsuwan put it recently at the Cambodia summit earlier this month, “"In 1997 the EU told us 'put your house in order'. This time, we appeal to Europe: put your house in order."

The elephant in the room, however, is which country will fund an expanded CMIM or buy the bulk ASEAN+3 bonds, particularly if the EU is barely out of its crisis (some say still in it), the US is in a weak recovery (some say headed down again) and Japan is rebuilding after its earthquake/tsunami/nuclear triple whammy (some say that it has never really recovered from the 1990s slowdown)?  That would be China, which is only slowly loosening its grip on outbound financial flows to protect its own economy.  Even if China were willing to let loose the flow of outbound capital into bond markets or take the lion’s share of CMIM funding, would the rest of ASEAN+3 want to be subject to greater financial influence by China? 

Both aspects make it difficult to see a faster expansion of the CMIM or Asia bond programs. Nevertheless, long-range planning for monetary crises and financial cooperation is still better than none. The question is whether the ASEAN+3 countries can find the will to establish institutions that will channel these competing considerations in a positive direction.