ASEAN, China, Japan, and South Korea – collectively ASEAN+3 – announced earlier this month that they are considering adding local currencies to the dollar-denominated regional currency swap arrangement.
While the language in the joint statement issued by the finance ministers and central bank governors did not specifically list which currencies could be made available alongside the dollar, the Chinese yuan and Japanese yen are widely viewed as the most likely candidates. Efforts toward this end, however, are likely to be entangled in the politics between Beijing and Tokyo, making the change difficult despite the economic benefits.
Even though the South Korean won may not be in contention, Seoul can play a major role in pushing through these talks as it has done in the past.
The regional currency swap arrangement traces its origins to the aftermath of the Asian Financial Crisis. Still recovering from the crisis, ASEAN+3 countries formed the Chiang Mai Initiative (CMI) – 16 bilateral swap agreements totaling $84 billion known – in 2000 to bolster emergency access 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 one another to stem the spread of contagion. Yet when the global financial crisis struck in 2007-2008, no country turned to the facility for help, mainly because the fund was too small. South Korea instead looked to the U.S. Federal Reserve in 2008 for a $30 billion bilateral swap deal, more than double what it could have drawn from the CMI.
To ensure its strength and relevancy for the next crisis, member countries have since set out to improve the CMI. In 2010 they launched the CMI Multilateralization (CMIM), which transformed the overlapping series of bilateral swaps into a self-managed 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 so too was the amount each member could borrow without triggering IMF conditionality. IMF de-linked funds were raised from 20 percent of a country’s drawing quota to 30 percent, creating the ASEAN+3 Macroeconomic Research Office (AMRO) in the process to take on greater regional economic surveillance responsibilities. In addition to its crisis management function, a credit line to prevent imminent crises was also created in 2014.
As tempting as it may be to frame the addition of local currencies to the CMIM as a China-led endeavor to contest the dominance of the dollar and promote the yuan, it is rather the latest push by members to improve the utility of the arrangement. Incorporating major currencies from members will also encourage trade in those currencies as continued access to a partner’s money is ensured. This serves to both limit foreign exchange risk and buffer economies in the region against outside shifts. Since the global financial crisis there has been particular concern about shocks from the United States reverberating in the region due to overdependence on the dollar, seemingly heightened now by the White House’s trade war with China. That South Korea, Japan, and ASEAN countries have all independently demonstrated interest in diversifying away from the dollar further challenges the notion that the proposed change to the CMIM is a power play by Beijing.
Nonetheless, power dynamics are still at play, particularly between China and Japan. Beijing will undoubtedly seek to promote the yuan through the CMIM in line with its broader efforts and Tokyo will want to ensure at least an equal if not greater standing for the yen on the grounds that its exchange rate is more liberalized. Getting to a solution that both can sign on to could 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 due in part to their shared interest in ensuring the economic stability of the region, but also to the ability of other ASEAN+3 countries to facilitate agreement between them, namely South Korea.
Seoul has played a key role in formulating and improving the regional currency swap arrangement. This is perhaps most apparent in the negotiations to create the CMIM. With Beijing and Tokyo vying for greater voting power in the planning of the new institution, Seoul broke the deadlock by proposing a quota system giving each equal say, which now forms the structure of the CMIM.
There are various reasons why South Korea has been essential in developing the regional financial safety net. Ramon Pacheco Pardo, Korea Foundation-Free University of Brussels Korea Chair, argues that Seoul has actively sought to be central to regional financial governance due to the growing importance of financial markets in the domestic economy, a self-perception and increasingly active role as a middle power, and support for ASEAN+3 institutionalization as ASEAN centrality has diminished. Other scholars, such as Kaewkamol Pitakdumrongkit at the S. Rajaratnam School of International Studies, also point out that South Korea is seen as an impartial actor without the geopolitical aspirations of Japan and China. These factors also make Seoul well-positioned to help break through any potential impasse on implementing local currency contributions to the CMIM.
This latest proposed upgrade to the CMIM won’t definitively answer questions about its usability, though it would yield immediate results. In addition to promoting trade in local currencies, it could also help lessen the possibility that bilateral currency swaps in the region – developed outside of the CMIM – would undermine regional cooperation. Just as it has been before, Seoul will be crucial in helping its neighbors overcome their differences to realize the potential benefits of changes currently on the negotiating table for regional financial governance.
Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America (KEI) and a contributor to The Diplomat’s Koreas blog.