Growth and Importance are Running Ahead of the Chiang Mai Initiative Multilateralisation

East Asian financial cooperation is at a crossroads. The Chiang Mai Initiative Multilateralisation (CMIM) and its surveillance unit — the ASEAN+3 Macroeconomic Research Office (AMRO) — are continuing to grow in size and importance. However the structure of these two organizations must change to accommodate this growth.

The CMIM is a currency exchange agreement among the finance ministries as well as central banks of the ASEAN+3 states (including the Hong Kong Monetary Authority). The scheme, which evolved from the earlier Chiang Mai Initiative (CMI) bilateral currency swap network in 2000, aims to provide financial support for short-term assets problems. To manage macroeconomic difficulties, each member can swap it’s local currency with US bucks up to the amount of its financial contribution to the reserve pool times its borrowing multiplier.

After an amended agreement that came into effect on 17 July 2014, how big the CMIM was doubled from its initial value of US$120 billion in order to US$240 billion, and a crisis-prevention mechanism — the CMIM Precautionary Line (CMIM–PL) — was introduced. The IMF delinked portion was raised to 30 percent, meaning that members might draw up to 30 percent of their maximum borrowing amount with out requiring IMF lending conditions.

Despite these types of accomplishments, the CMIM is still a work in progress. In May Next year, some member states pushed to increase the IMF delinked portion in order to 40 percent by 2014, but this has not yet been realised. AMRO continues to be drafting the operational guidelines and qualifications for accessibility CMIM–PL. And AMRO still has to go through domestic processes to ratify the ‘AMRO Agreement’, which will change it into an international organisation.

These issues are intertwined and are essential to advancing this regional financial safety net. Addressing these issues requires clear vision about the long term relationship between the CMIM and other international lending institutions such as the IMF.

The CMIM lending conditions must be tailored to be perfect for the interests and needs of East Asian nations, and can likely be different from the IMF’utes. But the differences between CMIM as well as IMF conditions must complement — not compete with — each other.

The link with the actual IMF remains another concern. Once the CMI was introduced, ASEAN+3’s monitoring mechanism was not on par with the IMF’s. The states agreed to include IMF lending conditions into the CMIM in order to discourage moral hazard (when states take on more risk after being insured through other institutions).

Since then, CMIM participants have worked to reduce links to the IMF. The delinked portion increased through 10 percent in 2000 to 30 percent in 2012. So when may ASEAN+3 raise the delinked portion further?

The solution largely hinges on how AMRO evolves in years to come. If AMRO is strengthened and functioning well as a surveillance unit, the likelihood of moral hazard will be reduced, requiring less links with the IMF.

But the entity must improve capability and further its role as an independent authority to effectively undertake these functions.

The easier job is strengthening AMRO’s effort. AMRO remains very small — housing no more than a dozen experts — but there has been steps in the right direction. ASEAN+3 possess added two deputy directors and something chief economist to the office.

But the jury is still out on how to make AMRO more independent. The entity aids the Executive Level Decision-Making Body (ELDMB) to create decisions on issues such as approving CMIM lending. But the ELDMB is actually mandated to oversee AMRO’s actions. The ELDMB consists of the deputy-level authorities of the ASEAN+3 finance ministries and main banks. As such, AMRO is inevitably tied to governments. Such a relationship could affect its activities.

It seems clear that the CMIM cannot escape from the old game of sovereign politics. In East Asian financial history, inconsistent interests and contestations between states have spilled over and influenced several CMIM details.

How may future outcomes unfold? Will they be in favour of the possible lenders (China, Japan and South Korea) or the potential debtors (ASEAN)? The decision-making structure of the CMIM has been set up in a way that no single fellow member is dominant. China (such as Hong Kong), Japan and the 10 ASEAN nations have equal vote reveal at 28.41 percent. South Korea’s vote reveal is smaller (14.77 %), but the two-thirds supermajority voting system allows the country to cast a determining vote under certain circumstances. Neither ASEAN nor the +3 nations may block a collective decision on its own. Future results will depend on how the parties collaborate with one another.

In coming years, we are likely to see how the CMIM will progress. It’ll involve both technical elegance as well as politics. But the outcomes that do unfold will reveal priceless information about the political dynamics in East Asia. For those interested in East Asian local cooperation, the CMIM is definitely worth keeping an eye on.

Where to now for the Chiang Mai Initiative Multilateralisation? is republished with permission from East Asia Forum