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The case for an Asian Monetary
Fund
By Henry C K Liu
Some
wonder about whether there should be a single currency
for mainland China, Hong Kong and Macau. Indeed, the
separate currencies for the two special administrative
regions (SARs) are a legacy of Western colonialism and a
transitional compromise accommodation of the "one
country, two systems" formula. The arrangement has no
economic rationale.
However, there is a broader
question about monetary cooperation throughout East
Asia, not just Greater China. It is a question that has
been high on the Asian agenda since the regional
financial crisis that began in 1997.
In 1978,
China experimented with multiple currency arrangements
in its special economic zones (SEZs): the renminbi (RMB,
also known as the yuan), the Foreign Exchange
Certificate, and the SEZ yuan. The result was
considerable confusion and added transaction cost and
friction. The arrangement was discontinued after three
years. Chinese central bank chief Dai Xianglong has said
he would "seriously consider" an International Monetary
Fund (IMF) proposal to ditch the yuan link to the US
dollar in favor of a link to a basket of currencies.
Full convertibility and free float would come after
that.
It is highly unrealistic to expect the
Hong Kong dollar to be a functioning currency
independent of the RMB for 45 more years, as mandated by
the Basic Law. It is likely that Hong Kong would
voluntarily adopt the RMB, or a currency with a close
link to it, as soon as the RMB is freely convertible.
Beijing has offered the option of a new currency as part
of the negotiation for the reunification of Taiwan. A
single currency for all parts of China, including
Taiwan, does not constitute a regional currency, but a
single national currency.
Although the yuan is
officially pegged to the US dollar at 8.2: 1, its (and
the dollar's) floating exchange value in relation to the
Japanese yen is of critical importance to both
economies. In 1998, when the yen fell to 147 against the
dollar, Beijing served notice that a yen below 148 would
force the yuan to devalue against the dollar. Tokyo and
Washington took steps to reverse the fall of the yen to
avoid a yuan devaluation. Washington had put forth the
notion that the Asian financial crisis of 1997 was
precipitated by Chinese devaluation two years earlier of
the RMB yuan from 5 to 8.2. Beijing has since received
praise from Washington for resisting devaluing the yuan
all through the Asian financial crisis that began on
July 2, 1997. Market forces since 1999 have been putting
pressure on the yuan to appreciate against other
currencies, reflecting China's robust economy. Some have
accused China of de facto devaluation through its rebate
of taxes (20 percent) to exporters.
In 1996,
about US$100 billion flowed into East Asia, but in 1997,
$150 billion flowed out in the three months after July.
Even though the Washington Consensus argued that
domestic policies had caused the Asian financial crises
that broke out in 1997, Asian governments have been
looking to regional financial arrangements to protect
themselves from similar volatility in the future. The
most visible cause for the crises was the
fixed-exchange-rate regimes adopted by Asian governments
through the 1990s, all pegged to the US dollar at rates
at odds with economic realities, alternatively too high
and too low. The fixed exchange rates had to be defended
by the central banks' foreign reserves earned from trade
surpluses accumulated at the pegged exchange rates. As
speculative attacks gathered force against the most
vulnerable Asian currencies, several central banks found
themselves drained of foreign reserves in short order,
forcing them to abandon the fixed exchange rates. As
local currencies devalued abruptly, it became impossible
for local-currency revenue to service short-term dollar
debts, causing defaults and bankruptcies and general
economic collapse.
To withstand the full fury of
money-market forces, it has been argued that domestic
policies have to reform in areas such as flexible
exchange rates, corporate governance, capital-market
deepening and increased market discipline. The World
Bank and the IMF have jointly prepared Reports on
Standards and Codes (ROSCs) to rate countries in eight
dimensions: statistical data dissemination, fiscal
discipline, supervision of banks, non-bank financial
institutions (NBFIs) and securities markets,
transparency in monetary and fiscal policies, payments
settlements, corporate governance, accounting and
auditing standards, and insolvency and creditor rights.
Yet unless an economically honest, or at least
responsive, exchange-rate regime is operative globally,
such reforms cannot happen at the local level. On some
of the eight dimensions, notably corporate governance
and accounting and auditing standards, the United States
is the leader of questionable practice. Yet the US
dollar has been exempt from attacks from market forces,
speculative or fundamental, because it is at once the
preferred currency for international trade and a fiat
currency that the US government can print at will. This
contradictory dual status of the dollar is what gives it
its hegemonic character.
The rapid pace of
globalization has brought forth an urgent need for a
Global Central Bank as lender of last resort, regulatory
authority, global rules and standards, etc. But the
reality is that this is not likely for the foreseeable
future because governments, except in such places as
Hong Kong and Argentina, are reluctant to surrender
national sovereignty in the protection of national
economic interest. What then is the option facing
individual governments? Already, the formation of the
European Union, the North American Free Trade Area
(NAFTA), Mercosur (Mercado Comun del Cono Sur, or
Southern Cone Common Market) and other groupings
demonstrate that other regions are moving ahead with
regional arrangements. East Asia has lagged behind
largely as a result of US geopolitical dictate.
The many market failures in the global financial
regime, panics and herd behavior, have been well
documented. Instead of dealing with the real problem,
the international creditor community responds with IMF
pressure. Not only will this approach not lift the
financial yoke on emerging market economies, it is also
unfair, because it imposes on these economies austerity
measures they do not deserve or, worse, serves no
constructive purpose except to perpetuate dollar
hegemony. Of course, countries need banking, accounting,
and regulatory standards, but there is no agreed best
universal practice. Even the Group of Seven (G7)
industrialized nations cannot agree among themselves on
a common standard. Even after Enron and Global Crossing
telecom IRU (indefeasible right of use of excess
capacity) swaps and WorldCom accounting-fraud
controversies, the United States continues to resist
regulation in favor of market discipline. Yet under
pressure from the IMF, developing countries are being
forced to do what the US rejects for itself. In
reaction, East Asian countries have gotten together to
discuss this issue and to arrive at their own common
standards. East Asia is quite capable of becoming a
common-currency area.
The most important changes
to the world's financial architecture are likely to come
from the new regional arrangements being realized in
East Asia by Japan, China, South Korea, and the 10
member countries of the Association of Southeast Asian
Nations (ASEAN). The idea of a multilateral cooperation
agreement was revived on May 6, 2000, when the finance
ministers of the ASEAN+3 countries met in Chiang Mai,
Thailand, and concluded an agreement called the "Chiang
Mai Initiative" (CMI).
The CMI was the first and
significant step in official financial cooperation for
the whole region, better to enable the region to cope
with potentially disruptive currency fluctuations and
international capital movements, so that the countries
within the region can protect themselves from volatile
and unpredictable capital movements. As a follow-up on
the CMI, an ASEAN Central Banks Forum took place
recently in Brunei and Kuala Lumpur. The 10 monetary
authorities of ASEAN then agreed to expand the size of
the multilateral currency-swap facility among the member
countries from $200 million to $1 trillion. The uniform
framework of bilateral swap agreements between the three
Northeast Asian countries and ASEAN was debated by the
10+3 leaders in their Singapore Meeting in November 2000
and Kuala Lumpur Meeting in April 2001. And in Honolulu,
exactly one year after the CMI was announced, three
bilateral currency-swap agreements between South Korea
and Japan, Malaysia and Japan and Thailand and Japan
amounting to an additional $6 billion were signed. China
and Japan signed a yen-yuan swap agreement in March
2001.
The CMI, which is a bilateral swap
arrangement among 13 countries, achieved much more than
expected. With monitoring and surveillance, it could be
the beginning of an Asian Monetary Fund (AMF). The
arrangement has already been in existence for two years
and participating countries are working together on the
regulatory arrangements.
The proposal of an
Asian Monetary Fund initially received a cool response
from the IMF and the G7, led by Washington, but their
position has softened since. IMF managing director Horst
Kohler has said that an Asian Monetary Fund would be
acceptable if it were complementary to the IMF, and this
has been echoed by the G7 and the Asia Europe Meeting
(ASEM).
Monetary cooperation in East Asia has
progressed at an encouraging pace. Examples of such
cooperation include the work toward the Asian Monetary
Fund, Manila Framework Group, ASEAN surveillance
process, ASEAN+3 surveillance process, Chiang Mai
Initiative, bilateral arrangements, short-term capital
flows monitoring by the ASEAN secretariat, ASEAN+3 early
warning system, third ASEM finance ministers meeting,
and the Kobe Research Project.
Structural
reform, while necessary, is not enough. There is a need
for a safety net through a regional financial
arrangement. Asia needs an Asian system, operated by
Asians and for Asia.
Exchange-rate stability and
monetary coordination are legitimate regional
multilateral concerns. Capital markets nowadays are
global but market power is not equally distributed. A
regional financial arrangement to deal with its
implications then becomes necessary. US and European
standards are converging rapidly. The Basel Capital
Accord is becoming more inclusive and East Asian
participation is complete. Yet there is evidence that
the Japanese banks' problems are caused largely by the
"international" standards of capital requirements that
do not fit Japanese historical conditions well. While it
may make sense to pool risks at the global level, it
makes even more sense to pool them at the regional
level, because international standards may not be
sensitive to regional conditions.
Sakakibara
Eisuke, the former Japanese vice finance minister for
international affairs, is an initiator of an Asian
monetary scheme. It has a distinct Japanese provenance -
even though Finance Minister Miyazawa Kiichi denies any
link between the current plan and one bearing his name
that emanated from Tokyo in 1997. Washington vetoed that
proposal during an IMF meeting in Hong Kong in October
1997, which called on the Asian Development Bank to
support Asian currencies that came under speculative
attack with a special $100 billion fund to be provided
by Japan.
The signatory governments of the CMI
agreed to contribute $40 million each to a common fund.
The money will be used to allow them to swap each
other's currencies and run a system to spot threatening
moves in currency markets. Still to be resolved are the
details of the "swap" mechanism, and exchange rates. The
plan is to build up a $20 billion war chest (an amount
proposed by Eisuke). The AMF won't replace the IMF, but
it could be a quick-reaction force to avert disaster
while the IMF deliberates on global implications. It can
also offer rescue packages more suited to Asian
conditions than typical IMF conditionalties, which have
been under serious criticism
Bilateral
relationship between an emerging East Asian economy and
the lead global economic power was historically the
strategy for a regional economy to achieve growth. This
phenomenon, which brought economic growth in tandem with
inter-regional relationship that lacked sufficient
diversification, rendered the economies of the region
susceptible to severe and excessive external shocks.
Most major East Asian economies depended on
extra-regional trade and investment, while
intra-regional financial flows were relatively light.
Sudden and simultaneous capital flights by
extra-regional investors and creditors left the region
devastated in 1997. The concentration of
foreign-currency-denominated external loans was an
economic disaster to the countries in the region,
because practically all of them were short of foreign
exchange for external debt repayment when the financial
crisis erupted in 1997. When local-currency depreciation
precipitated a loss of confidence on the part of foreign
investors and creditors, short-term external loans were
recalled and massive capital flights followed. Many
Asian countries were caught short of foreign-currency
assets, and external debt repayment difficulty mounted
overnight.
Currency speculation that contributed
to the triggering of a process that led to the economic
(and political) collapse of several countries in Asia
was a clear proof of the lack of effective, cohesive
cooperation in the region. The only option remaining at
the time was to turn for assistance to stronger
economies and international financial institutions whose
interests were not closely aligned with those of the
region.
In order to prevent international
currency speculation, it is essential that any
preventive financing be arranged in large amounts and
quickly. Hong Kong, with its huge US dollar reserves,
was able to withstand speculative attacks, albeit at
high cost. What is even more important, therefore, is
the sheer availability of a sufficiently large financing
facility standing ready to assist. Such readily
available financing can serve as an effective preventive
mechanism against the possibility of a
balance-of-payments difficulty. International
organizations that endeavor to provide assistance
financing globally are already spreading their resources
too thin. China and Hong Kong each provided the IMF with
$1 billion in July 1997, with the understanding that the
IMF would contain the crisis within Thailand. Instead,
the IMF exploited the crisis to promote dollar-based
global market fundamentalism. The East Asian region
therefore must accept the fact that it has to rely on
itself more than on outside help alone.
Unlike
many of the cases in Latin America, it can be argued
that the balance-of-payments problems of 1997-98 in Asia
were not fundamental but transitory in nature. They were
in fact due to unforeseen and sudden capital outflows.
Moreover, the crisis could have been a mere temporary
setback had it not been further aggravated by
restrictive IMF policy stances taken in the earlier days
after the crisis. The Malaysian temporary financial
derailing may provide a case in point, and swift
deinternationalization of its currency worked. For the
most part, the Asian financial crisis was thus more of
the capital-account-related nature than that of the
traditional current-account disequilibrium.
After the 1997 financial crises, Asian countries
began to look inward within the region. The concept of
self-reliance and mutual support, lying dormant for so
long under the domination of globalization, has been
revived. Although regional trade cooperation in Asia has
been continuously strengthened via economic
consolidation, cooperation in financial areas still
leaves much to be desired. Financial illiquidity of
Asian countries during and immediately after the crisis
provides sufficient evidence to prove the point. Hong
Kong suffered for its market liquidity more than for
fundamental weakness. Regional investors sold in liquid
Hong Kong markets to meet margin calls to try to save
their investments in other illiquid parts of the region.
The 1997 financial crisis of Asia necessitated
international financial adjustments in the crisis-hit
countries. Japan, China, Hong Kong and other Asian
countries were ready to help, despite their own domestic
problems, but were prevented from doing so by
Washington. This brought about the awareness of need for
greatly enhanced intra-regional trade and finance and
led ultimately to some form of coordinated,
intra-regional, financial policy framework and shared
financial resources, something close to a new
international financial architecture for Asia.
In order to strengthen self-help and support
mechanisms in East Asia through the ASEAN+3 framework,
the need to establish a Regional Financing Arrangement
(RFA) to complement the existing international
facilities is recognized. The CMI multilateral and
bilateral swap facilities that are put in place among
the 10+3 monetary authorities will be utilized only when
one or more countries encounter short-term and temporary
balance of payments difficulties. In the framework of
the RFA, the emphasis is placed on the role of the
regional currencies. This is a major theme in the
arrangement.
The lack of currency
diversification in the past led to detrimental effects
associated with external payments difficulties. The
multi-currency placement mechanism is thus designed in
an attempt to reflect this diversification objective.
Based on the amount of total out-placements, each
country can then borrow up to a multiple of the
placement amount, a concept similar to the
much-practiced margin loans in the securities business.
A formula to determine each country's multiple would be
developed and negotiated, perhaps on the need to borrow
and ability to repay basis. Once the multiples are
agreed upon, each of the monetary authorities can
utilize the multilateral and bilateral swap facilities
up to the maximum amount as determined by the respective
multiples.
The RFA also introduces a new element
in regional financial cooperation, one of building up a
formal and committed relationship among the
participating member countries from Day 1 onward, prior
to any borrowing actually taking place. The system so
envisaged will in effect become a mutual give and take,
which forms a fair and logical foundation for financial
self-help and support among monetary authorities of the
East Asian countries.
The countries within the
region need to be protected against serious
balance-of-payments and international-liquidity
problems. The financing facility required for the
purpose must be accompanied by proper monitoring of
capital flows and an efficient regional surveillance
process. The resulting regional financing arrangement
(RFA) will then constitute an important element in East
Asia's self-help and support mechanisms. The development
and implementation of the RFA must therefore be
expedited with binding commitment by the regional member
countries.
The implementation of the ASEAN Swap
Arrangement (ASA) and some bilateral swap agreements
between Japan and South Korea, Malaysia and Thailand
have been finalized, thereby completing the first
building block of the East Asian financial cooperation.
By the end of 2001, comprehensive research had been done
on the subject of capital-movement monitoring within the
framework of ASEAN+3. By last month, two-way bilateral
swap arrangements (TBSAs), or arrangements whereby
China, Japan, and South Korea can financially assist one
another in a reciprocal manner in times of similar
needs, were also to have been instituted. The second
building block in the framework of ASEAN+3 financial
cooperation will be completed.
The third
building block of mutual placements will be completed
among the 13 regional countries as the foundation of the
RFA scheme by year-end 2002 at the latest, by which time
obstacles to the regional financing arrangement will
also have been eliminated or minimized. In order to get
the new RFA scheme off the ground rapidly, concrete
operations can conceivably begin to proceed step by step
as early as possible. Any ASEAN+3 country that is
willing and well prepared enough might begin by making
some bilateral agreements within the framework of this
scheme and then keep on expanding the number of new
partners with which further agreements can be made. Once
all the possible pairings of countries are achieved,
full-scale "constructive engagement" of the multilateral
RFA scheme will thereby have been completed and a
full-fledge preventive scheme created and ready to be
activated whenever called for by the events.
The
monitoring and surveillance unit for the ASEAN+3
countries will have built up its expertise and
facilities such that it will stand ready, together with
a final decision-making body well institutionalized to
deliberate on recommendations tabled by the monitoring
and surveillance unit upon regional member countries'
requests for drawdowns of assistance funds, by mid-2003.
Within a decade pursuant to the time when the
multi-currency placements will have been made, regional
financial cooperation and institutionalization will have
grown to a point where a common-currency area will
become a viable and realistic option for East Asia.
In the near future, the finance ministers and
central bank governors of the 10+3 East Asian countries
will have the final say as to what would be the
modalities, sizes, mechanisms, operating procedures,
rules, and regulations of East Asia's RFA. Whatever and
whenever they finally decide upon as a logical follow-up
to the CMI, East Asia will move another step closer to
the ultimate goal of intra-regional cooperation and
integration to stabilize the foreign-exchange markets
and macro financial systems of the member countries.
This newly proposed RFA scheme would aim at
eventually becoming complementary to existing
international facilities in terms of the out-placements
made up front as well as the time frame involved in the
operations; it would have sufficient size; and it would
allow certain ASEAN member countries to benefit from the
financing from the Northeast Asian countries, which they
otherwise might not be able to gain access to under a
bilateral framework.
There is also the question
of moral hazard, whereby a country realizing that there
is emergency rescue funding available might become less
cautious with its macroeconomic policy management,
particularly as related to the balance of payments. A
crisis to be avoided would therefore be inadvertently
made to happen. To avert the problem of moral hazard,
the scheme as proposed must be accompanied by an
effective and efficient system of surveillance,
self-monitoring, peer review, and final decision-making
capability.
China views the CMI as a substantial
step toward financial cooperation among East Asian
countries. The objective is to complement existing
international facilities by providing liquidity support
for the nations in difficulty of international payment.
According to Article 7 of the CMI, 10+3 finance
ministers also mandated the ASEAN secretariat, on top of
the currency-swap agreement, to work on an appropriate
self-financing vehicle for the region with a view to
strengthening the collective capacity against a possible
future financial crisis.
East Asian cooperation
has a strong political commitment, thereby creating a
solid foundation and impetus for further development. In
the face of the difficulties posed by the 1997 financial
crises, the leaders of Asian countries have realized
that it is imperative for them, through coordination and
cooperation, to strengthen collective capability against
crises so as to recover their economies as quickly as
possible.
In this context, the leaders of ASEAN,
China, Japan and South Korea took advantage of the 30th
anniversary of ASEAN to hold their first informal
meeting in Malaysia in late 1997. Since then, leaders of
ASEAN+3 have met regularly and had in-depth discussions
on the issues concerning regional finance, economy,
politics and security, etc. Specifically, they reached
the consensus on the key role of financial stability in
sustaining regional economic development. The leaders
also shared the conviction that building a peaceful
environment for economic development serves the greatest
common interest of East Asian countries. To this end, it
is imperative for the East Asian countries to strengthen
coordination and cooperation among themselves. In
November 1999, leaders of 10+3 issued the Joint
Statement of East Asia Cooperation in Manila, which
crystallized the direction and priority for the future
by highlighting the importance of developing economy
through cooperation.
In light of this principle,
the concept of a regional financing mechanism symbolized
by the CMI has been moving forward steadily while
cooperation in trade and investment is making headway.
The financial and economic cooperation under
10+3 framework has given a spur to the progress in
overall East Asian cooperation. In November 2000, the
fourth 10+3 informal leaders meeting in Singapore agreed
to designate two task forces to study the possibility of
transforming informal meetings to summits and
establishing an ASEAN + Northeast Asia Free Trade Zone.
Moreover, the leaders of China, South Korea and Japan
agreed to meet regularly on the occasion of the 10+3
leaders meeting since 2001.
Given their
diversified background in history, culture and level of
economic development, the East Asian countries must
pursue regional cooperation in a gradual and orderly
manner, taking into account their unique
characteristics. Compared with other regional
cooperative mechanisms, particularly the European
economic and monetary union, Asian nations are more
diversified in history, culture, political regime, and
levels of economic development. In recent centuries,
Western imperialism and colonialism have fragmented
Asia. The Cold War aggravated that fragmentation.
Therefore, there is still a long way to go and arduous
task faces these nations. They must choose a cooperative
pattern suitable to the regional characteristics rather
than blindly copying the model of others.
It is
noteworthy that the evolution of ASEAN itself
experienced several stages. It started with those
countries of similar economic features, then was
gradually expanded to more countries. Likewise, the
current cooperation among the East Asian countries
should also start from the areas where the consensus can
be more easily reached, and then spread gradually on the
basis of consolidation. In contrast to other regional
organizations that started from trade cooperation before
their expansion, East Asian cooperation started from the
financial field where they shared consensus before the
comprehensive cooperative relations could be gradually
established in the fields of finance, trade and
investment.
East Asian cooperation has emerged
along with the vigorous momentum of regionalization in
the global economy, which is consistent with economic
globalization. Globalization has two sides. While having
accelerated world economic development, it has also
brought about the problem of uneven distribution of
benefits, thereby accentuating global economic
polarization. As a result of dramatic advancement of
modern information technology, the digital divide has
further widened the income and development gap between
the developed and developing countries. Many developing
countries found themselves increasingly marginalized in
the course of globalization.
Developments in
Asia do not always received adequate attention in the
Western media. This summary may serve to help correct
the impression that Asia is merely an appendix of a
Western global system.
Henry C K Liu
is chairman of the New York-based Liu Investment
Group
(©2002 Asia Times Online Co, Ltd. All
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Hong
Kong in flux: Pegged
down
