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Chiang Mai Initiative Multilateralization

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JOHN D. CIORCIARIChiang Mai Initiative MultilateralizationInternational Politics and Institution-Building in AsiaABSTRACTIn 2010, the Chiang Mai Initiative Multilateralization agreement established a newAsian financial arrangement to help address potential currency or liquidity crises.This article analyzes the origins and basic features of the new arrangement, whichreflect both progress and the continuing political challenges of building regionalinstitutions in Asia.KEYWORDS: ASEAN, ASEAN Plus Three, Asian financial cooperation, Chiang MaiInitiative, International Monetary FundIN MARCH :c:c, AN IMPORTANT NEW Asian financial arrangement came intoeffect. Pursuant to the Chiang Mai Initiative Multilateralization (CMIM)agreement, the central banks of Japan, China, Hong Kong, South Korea,and the :c members of the Association of Southeast Asian Nations (ASEAN)contributed a total of US$::c billion to a multilateral swap facility. The statedgoal of the new facility is to provide lifelines to participating economies inneed. The accord represents one of the most tangible outcomes of more thana decade of diplomatic dealings in Asias various multilateral forums. Its devel-opment thus carries significant implications, both for financial cooperationand the broader process of institutionalizing international relations in theAsia-Pacific.The new facility is not a full-fledged monetary fund. It is an incrementaladvancement on the preexisting network of bilateral swaps established underthe Chiang Mai Initiative (CMI). The incremental nature of the new facilityscreationand the importance that ASEAN + , states attach to the diplomaticcreation processhelp explain why it was born with an awkward name.JOHN D. CIORCIARI is Assistant Professor at the Gerald R. Ford School of Public Policy at theUniversity of Michigan. Email: .926Asian Survey, Vol. ,:, Number ,, pp. ,:o,,:. ISSN ccc-o;, electronic ISSN :,,,-,X. :c:: bythe Regents of the University of California. All rights reserved. Please direct all requests for permissionto photocopy or reproduce article content through the University of California Presss Rights andPermissions website, http://www.ucpressjournals.com/reprintInfo.asp. DOI: AS.:c::.,:.,.,:o.Its architects refer to it as CMIM (usually dropping the definite article),although the words behind that acronym describe a process (multilateraliza-tion) rather than a centralized fund or institution.1This article analyzes CMIMs basic institutional features and the interna-tional politics that contributed to them. It argues that the most importantinteractions have occurred between richer and poorer economies, betweenChina and Japan, and between Asian officials and their Western counter-parts, especially at the U.S. Treasury and the International Monetary Fund(IMF). Cooperation and contestation along each of those three axes havecontributed to a financial arrangement that remains lightly institutionalizedand embodies a series of carefully calibrated balances to accommodatediverse intra-regional and extra-regional interests.FROM CRI SI S TO CRI SI S: THE ROAD TO A MULTI LATERAL AGREEMENTBefore :,,;, Asian financial cooperation focused mostly on technocraticdialogue and training. Meetings began among selected Southeast Asian cen-tral banks and their peers from Australia and New Zealand, later folding inKorea and Japan. In :,,:, central bankers launched an Executives Meetingof East Asia Pacific Central Banks including China, and finance ministersbegan to meet through the APEC forum in :,,. Asian central bankers alsoset up currency swaps and repurchase agreements for emergency financialassistance.2Five Southeast Asian states set up an ASEAN Swap Arrange-ment in :,;;, and a number of Asian central banks participated in establish-ing a series of bilateral repurchase agreements coordinated by the HongKong Monetary Authority in :,,,. These facilities were small, however,and more important as symbols than as financial safety nets.A Thwarted Asian Monetary Fund ProposalThe :,,;, crisis prompted the first call for a more robust, institutionalizedemergency financial mechanism in Asia. Shortly after the crisis struck, Japans:. This semantic device has been used in the region before; Asia-Pacific Economic Cooperation(APEC) likewise bears a name that emphasizes process over institutional concreteness.:. Currency swaps and repurchase agreements are essentially loans. A borrower exchanges hardcurrency for local currency or U.S. Treasuries, respectively, and later reverses the transaction, pay-ing interest.CI ORCI ARI / ASI AN I NSTI TUTI ON- BUI LDI NG 927Vice Minister of Finance Sakakibara Eisuke proposed creating a $:cc billionAsian Monetary Fund (AMF) comprising regional reserves to deploy to coun-tries under stress. His plan appealed to many poor Asian states, which fearedcalamity and sought supplements or alternatives to IMF-conditioned loans.Nevertheless, the proposal quickly foundered under stiff opposition fromChina and the West. U.S. Treasury Secretary Lawrence Summers and Under-secretary Timothy Geithner argued that a regional fund could undermine theIMF by lending money with weak or inconsistent policy conditions. SomeWestern and IMF officials also feared that an AMF would threaten their rolesin the region and encourage policies disadvantageous to non-Asian econo-mies. Officials in Beijing feared that their counterparts in Tokyo would usea regional institution to leverage Japans immense reserves for political andeconomic gains at the expense of the Peoples Republic of China (PRC).They were also loath to antagonize America because they were seeking WorldTrade Organization (WTO) accession.3An Alternative Approach through the Chiang Mai InitiativeThe swift scuttling of Japans AMF proposal reflected the difficulty of devel-oping multilateral bodies in Asia. Nevertheless, the :,,;, crisis generatedrenewed regional political interest in financial cooperation. The IMF led amajor bailout effort, but recipients bitterly resented its conditions and delaysin disbursement. A generation of Asian economic officials believed that theWest had left them in the lurch, and sought to build stronger regionaldefenses.4Asian governments sought to insure themselves by stockpilingreserves, imposing indirect currency controls, and reforming domestic bondmarkets, but they also became increasingly interested in establishing a regionalsupport mechanism. Japan launched the New Miyazawa Initiative in October:,,, providing $,c billion for regional financial defenses, and China beganto exercise regional leadership by resisting pressure to devalue the renminbi,. Phillip Y. Lipscy, Japans Asian Monetary Fund Proposal, Stanford Journal of East AsianAffairs ,:: (Spring :cc,), pp. ,,,o; and Jennifer Amyx, Moving beyond Bilateralism? Japanand the Asian Monetary Fund, Pacific Economic Paper, no. ,,:, Australia-Japan Research Center(Canberra), :ccc, pp. .. C. Fred Bergsten, East Asian Regionalism, Economist, July :,, :ccc, pp. :::; ShalendraD. Sharma, Beyond ASEAN and APEC: Towards a New Asia-Pacific Economic Regionalism,East Asian Review ::, (Autumn :cc:), pp. c:; and Chalongphob Sussangkarn, A Frameworkfor Regional Monetary Stabilization, NIRA Review (Autumn :ccc), pp. :o:.928 ASI AN SURVEY 51: 5during the crisis and otherwise offering support for ailing neighbors.5Theseevolving political dynamics made possible the birth of ASEAN + ,China,Japan, Korea, and the ASEAN states.6ASEAN + , finance ministers metfor the first time in :,,, and set three core goals: strengthening regional bondmarkets,7promoting monetary policy cooperation,8and creating an emer-gency financing facility. CMIM would emerge from this third goal.Creating an effective emergency financial mechanism would require sup-port, or at least some assent, from China and Japan, and from weaker statesin the region and key external actorsparticularly the U.S. The AMF con-cept had been too dramatic a departure from Asias cautious and incremen-tal approach to institution-building. When regional officials returned to thedrawing board, they took a much more modest approach. Rather than try-ing to build a multilateral bailout facility, they began weaving a web of indi-vidually negotiated bilateral currency swaps.9The size and number of swapsgrew over time; by :cc,, :o swaps were in place with a total notional valueof $,c billion (see Figure :).Using swaps appealed to both prospective borrowers and lenders. Theformer feared speculative attacks or external shocks and sought a quick, reliable,. Alice D. Ba, China and ASEAN: Renavigating Relations for a ::st-century Asia, AsianSurvey ,: (July/August :cc,), pp. o,,.o. See Richard Stubbs, ASEAN Plus Three: Emerging East Asian Regionalism? Asian Survey::, (May/June :cc:), pp. c,,; and Douglas Webber, Two Funerals and a Wedding? The Upsand Downs of Regionalism in East Asia and Asia-Pacific after the Asian Crisis, Pacific Review ::,(August :cc:), pp. ,,,;:. ASEAN + , essentially resurrected Mohamad Mahathirs proposal foran East Asia Economic Caucus, which had withered in :,,c under opposition from the U.S.,Japan, and other proponents of APEC and open regionalism.;. ASEAN + , efforts to strengthen bond markets include fostering research and dialoguethrough the Asian Bond Markets Initiative and participating in related regional initiatives suchas the A

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