Asian policy makers are doubling the size of their foreign-currency reserve pool as officials step up efforts to shield the region from global financial shocks.
Finance ministry and central bank officials from Japan, China, South Korea and 10 Southeast Asian nations agreed to boost the so-called Chiang Mai Initiative Multilateralization agreement to $240 billion, according to a statement after their meeting in Manila today. The Asean+3 countries, as the group is known, will also set up a precautionary credit line to let members tap the pool to prevent a crisis, and will allow more funds to be used without being linked to an International Monetary Fund program.
“We strongly believe that our agreement made today on strengthening the CMIM, including doubling its total size, increasing the IMF de-linked portion, introducing the crisis prevention function” will help strengthen the regional financial safety net, the officials said.
Asian nations, which hold more than half of global reserves, are looking within themselves to protect the world’s fastest-growing region as Europe and the U.S. struggle to recover from the worst economic slump since World War II. The countries have bolstered cooperation since a regional crisis almost 15 years ago, when Thailand’s baht devaluation set off a plunge in neighboring currencies and sparked a financial meltdown.
“It is a very significant step and certainly strengthens the firepower of Asean+3 in a very significant way,” Rajat Nag, managing director general of the Asian Development Bank, said in an interview with Bloomberg News. “It also has a psychological context that the region is willing to come to the defense of each other. That will make the region that much more able to take care of itself.”
Japan announced today that it will use foreign-exchange reserves to buy South Korea government bonds as it looks to diversify its assets after striking a similar agreement with China in December. That led to an application to buy about $10 billion of Chinese bonds in February.
The move comes as the yen remains close to a high against the dollar that has hurt exporters such as Sharp Corp., while South Korea’s Samsung Electronics Co. has benefited from a weaker won.
“Buying foreign bonds is basically a measure to curb the yen’s gains,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo. “The weaker won and stronger yen have affected a lot to international competitiveness of Japanese companies, especially in industries such as electronics, semi-conductors and automobiles.”
Asian officials are mixed on the outlook for the global economy. While ADB President Haruhiko Kuroda said yesterday that the worst of Europe’s sovereign debt woes is probably over, former China central bank adviser Yu Yongding said the situation may worsen.
Spain, Europe’s fifth-largest economy, has become the focus of policy makers attempting to contain the debt crisis, and Prime Minister Mariano Rajoy is struggling to quell speculation that the country will need a bailout.
The increased cooperation between Asian nations may reduce their reliance on traditional backstops such as the International Monetary Fund as Europe saps resources. The IMF, which bailed out South Korea, Indonesia and Thailand during the 1997-98 Asian financial crisis, estimates that the euro area will take up about 80 percent of its total credit in 2014.
The Chiang Mai Initiative Multilateralization agreement took effect in 2010. It supplements existing international financial arrangements through currency swap transactions among member nations if needed, or can act as a backstop for those facing balance-of-payments or short-term liquidity difficulties. The swap agreements have not been tapped.
The increase in the Chiang Mai Initiative will be a fraction of the foreign-currency holdings that Asian nations have accumulated, totaling more than $6.5 trillion. China alone has about $3.3 trillion of reserves, followed by Japan’s holdings of more than $1.2 trillion.
The pool widens access to reserves that will allow countries such as Indonesia and Thailand to defend their currencies in times of turmoil. During the Asian financial crisis, the IMF loaned more than $100 billion to the two nations and South Korea, and governments were forced to cut spending, raise interest rates and sell state-owned companies in return.
Asean+3 officials said today countries can tap as much as 30 percent of their allotment in the fund without being tied to an IMF program, and that may be increased to 40 percent in 2014. Currently, the portion that is delinked from the IMF is 20 percent.
“We shall continue to engage the IMF in the areas of surveillance, financial safety net and capability development,” the ministers said.
Even as they increase cooperation through the Chiang Mai Initiative, Asia is unlikely to follow Europe in pursuing a single currency anytime soon. Malaysian central bank Governor Zeti Akhtar Aziz said yesterday the region remains too diverse and such a move would be too costly.
“We do not have the convergence or the preconditions even in the next 10 years or beyond that” to achieve a common currency, Zeti said. “It’s not worth our while to pursue that but what we are pursuing to achieve the very same objectives that Europe wanted to achieve and that is a greater shared prosperity for our regions. We are doing it through greater financial integration.”