Renminbi Takes on More Prominent Role in Asian Financial Safety Net
Significant revisions to Asia’s $240 billion regional financial safety net went into effect Wednesday, marking a key step toward financial self-reliance for participating countries using local currencies with less dependence on the U.S. dollar.
China, Japan, South Korea and the 10 member countries of the Association of Southeast Asian Nations (ASEAN) agreed last year to amend the Chiang Mai Initiative Multilateralization (CMIM) accord. The changes institutionalize the use of members’ local currencies in addition to the U.S. dollar for borrowings in a financial emergency, the People’s Bank of China said in a statement. In addition, the borrowing limits were raised.
The Covid-19 pandemic increased the need for international cooperation in finance. The ASEAN countries, China, Japan and South Korea adopted the CMIM amendment at a September 2020 meeting of finance ministers and central bank governors. In the face of the coronavirus crisis and its aftermath, strengthening the regional financial safety net is an important complement to the fiscal and monetary support provided by each country, participants in the meeting said in a statement.
Following the Asian financial crisis in 1997, Asian countries sought to cooperate in managing regional short-term liquidity problems. The CMIM began as a series of bilateral swap arrangements that provided access to U.S. dollar liquidity when a member country suffered a financial shock. But to obtain such liquidity support, member countries had to first negotiate with the International Monetary Fund (IMF), a 190-nation institution that promotes global financial stability and monetary cooperation. The IMF serves as an emergency lender for member nations under strict conditions.
Reliance on IMF support and the American dollar brought about inconveniences, said Barry Eichengreen, professor of economics at the University of California, Berkeley. The previous requirements for crisis financing reflected a lack of confidence in regional currencies, he said.
Since the Asian financial crisis, the CMIM has gone through two major rounds of revisions. After the 2008 global financial crisis, the CMI — as it was then known — created a pool of foreign exchange reserves in 2010 totaling $120 billion. The pool was expanded in 2012 to $240 billion.
As amended, the CMIM increases the amount of money not linked to the IMF that participating nations can borrow to 40% of each member country’s maximum amount from 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 can swap its local currency for U.S. dollars from the CMIM pool. Each country's borrowing quota is based on its contributions multiplied by a country-specific multiplier.
The amendment taking effect reflects less of a need to use U.S. dollars for intra-Asian transactions as China’s renminbi becomes a more important international currency, Eichengreen said. Now member countries are more confident in the CMIM’s supervision, reducing the need to rely on the IMF for such functions, he said.
At the operational level, the CMIM’s $240 billion safety net is made up of pledges of $192 billion from China, Japan and South Korea, and $48 billion from the 10 ASEAN countries. The liquidity can be provided in local currencies such as renminbi or the Japanese yen with the consent of member countries. The ASEAN nations are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
Contact reporter Denise Jia (firstname.lastname@example.org) and editor Bob Simison (email@example.com).
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