The October 23-25, 2009 ASEAN summitFocused on boosting regional trade, investment and connectivity, establishing a Human Rights Commission, creating an infrastructure development fund, and tackling climate change and food security.
The members reiterated that the US$120 billion Chiang Mai Initiative Fund will be operational by the end of 2009.
The leaders underscored the need to progress on the Asian Bond Market Initiative to finance development projects, and an East Asian Free Trade Area. Debate on the trade dispute between Thailand and Philippines, human rights issues related to Burma and political instability in Thailand also marked the summit. Thailand will hand over the ASEAN chairmanship to Vietnam at the end of 2009.
The leaders emphasized on regional trade agreements that have or will be ratified in the coming quarters -- the ASEAN-New Zealand-Australia Free Trade Area, the ASEAN-China Free Trade Area, and the ASEAN-India Trade in Goods Agreement. With the U.S. de-leveraging in the coming years, ASEAN members are entering into regional trade agreements to boost intra-Asia trade for final demand and reduce dependence on the U.S..
Critics argue that such trade agreements create "trade noodle bowls", increase trade inefficiency, discriminate against other Asian countries and form a stumbling block to multilateral free trade. Moreover, Asian consumption is a small fraction of U.S. consumption and cannot offset the decline in U.S. demand in the short-run, until incomes grow and Asian economies implement reforms to boost domestic consumption.
Haruhiko Kuroda, president of the Asian Development Bank, said the global crisis is an opportunity for Asia to rebalance its sources of growth and increase intra-regional trade and domestic consumption. Referring to the recent strengthening of the yen and foreign exchange intervention by Asian central banks, he emphasized that Asia must cooperate on intra-regional currency movements to boost regional trade. (via FT, October 25, 2009)
Japan's prime minister, Yukio Hatoyama, proposed creating an East Asian Community (EAC) comprising of the ASEAN countries and Japan, China, India, South Korea, Australia and New Zealand.
The EAC will be similar to the European Union and complementary to the Asia Pacific Economic Cooperation (or APEC which includes the U.S. and other Pacific countries). Australia has also proposed an Asia-Pacific Community which would include the U.S. and India. However, China has reservations about including the U.S. in any Asian regional community.
At the July 2009 meeting, the ASEAN Foreign Ministers:
At the July 2009 meeting, the ASEAN Foreign Ministers:
1) Formally adopted the Terms of Reference of the ASEAN Human Rights Body to promote and protect human rights.
2) Amid risks from recent missile launches, the ministers plan to keep North Korea engaged, particularly through the ASEAN Regional Forum.
3) They stressed on the implementation of the ASEAN Charter to speeden Asian regional integration.
4) The meeting also included accession of the U.S. to the TAC (Treaty of Amity and Cooperation in Southeast Asia).
5) Develop infrastructure linkages among ASEAN countries and between ASEAN and India and China to promote regional connectivity.
6) Implementation of the 2002 Declaration on the Conduct of Parties in the South China Sea.
7) Include political and security issues under priority areas. 8) Close development gaps between the ASEAN countries. (ASEAN Communique)
In May 2009, 13 Asian countries agreed to complete a US$120 billion multilateral foreign-exchange pool from the current US$80 billion by 2009-end under the Chiang Mai Initiative (CMI) that can be used to defend their currencies.
Japan will contribute US$38.4 billion to the fund. China and Hong Kong together will add US$38.4 billion to the pool and South Korea’s contribution will be US$19.2 billion. Southeast Asia will contribute the rest 20% of the pool - Thailand, Indonesia, Malaysia and Singapore will contribute US$4.77 billion each and the Philippines will provide US$3.68 billion.
The agreed components of the CMIM are consistent with its two core objectives:
The agreed components of the CMIM are consistent with its two core objectives:
1) To address short-term liquidity difficulties in the region.
2) To supplement the existing international financial arrangements. An independent surveillance unit will be established to monitor and analyze regional economies and support CMIM decision-making. Also, Hong Kong and China are welcomed to participated in the CMIM.
In February 2009, Asian countries had agreed to expand this multilateral pool from US$80 billion to US$120 billion after moving from a bilateral swap agreement to a self-managed multilateral reserve pool in May 2008.
Additionally, Japan has agreed to offer US$60 billion of yen-denominated swap facilities to help nations during the financial crisis and to guarantee up to 500 billion yen (US$5 billion) of yen-denominated Samurai bonds issued in Japanese markets by developing countries.
Turmoil in global equity and credit markets in Fall 2008 hit Asia severely: Money markets faced liquidity squeeze and high short-term rates; stock market corrected amid FII (Foreign Institutional Investor) sell-off; capital flight put downward pressure on currencies leading to central bank intervention in FX market and decline/slower growth in FX reserves.
Additionally, Japan has agreed to offer US$60 billion of yen-denominated swap facilities to help nations during the financial crisis and to guarantee up to 500 billion yen (US$5 billion) of yen-denominated Samurai bonds issued in Japanese markets by developing countries.
Turmoil in global equity and credit markets in Fall 2008 hit Asia severely: Money markets faced liquidity squeeze and high short-term rates; stock market corrected amid FII (Foreign Institutional Investor) sell-off; capital flight put downward pressure on currencies leading to central bank intervention in FX market and decline/slower growth in FX reserves.
Banks were also affected by global contagion, high funding cost, diminishing earnings, high foreign-currency exposure and leverage. Exports, foreign direct investment (FDI) and external borrowings took a hit.
EIU: The expansion in the CMI does not initially look too impressive, given that the meeting of G20 countries in April 2009 in pledges to triple the IMF's reserves, from US$250 billion to US$750 billion. The severity and synchronization of the global crisis imply a need for a much larger pool of emergency funding. Furthermore, the IMF has now conceded that its loans need not always have stringent policy conditions. Its new Flexible Credit Line (FCL) embodies this view, as the FCL is designed to be used as a contingency by countries with sound economic fundamentals. (May 4, 2009)
William Pesek of Bloomberg: The US$120 billion seems like a paltry sum in today's world of cascading markets and recession. However, the size of the stockpile is not the issue. It's the symbolism that really matters here and it can always get bigger as China and Japan boast almost US$3 trillion of currency reserves. Nevertheless, there are risks to consider, including moral hazard. Asian governments need to enforce a specific and clear set of guidelines and surveillance practices. (May 6, 2009)
Moving Towards Greater Monetary Cooperation
February 2009: Japan agreed to provide Indonesia with financial guarantees of up to US$1.5 billion in issuing yen-denominated samurai bonds.
January 2009: China and Hong Kong agreed on a US$29 billion currency swap to ease cash shortages and bolster Hong Kong role as a foreign exchange hub. Hong Kong Monetary Authority will be allowed to draw on funds as needed for short-term liquidity for up to three years.
December 2008: South Korea and Japan agreed to increase an existing unconditional KRW-JPY swap arrangement to US$20 billion from US$3 billion effective until April 2009. This supplements a US$10 billion agreement that can be used in times of crisis. China and South Korea agreed to a new bilateral KRW-CNY swap agreement for US$28 billion for three years which give South Korea access to US$35 billion equivalent of foreign currencies.
In the October 2008 Asia-Europe Meeting, leaders announced that Asia will undertake effective and comprehensive reform of the monetary and financial systems, increase cooperation in consultation with international financial institutions, urging the IMF to play a major role.
Thailand's proposal:
1) ASEAN with Japan, China, South Korea should pool US$350 billion or 10% of their US$44.4 trillion FX reserves to protect their financial system: US$150 billion that can be tapped to protect their currencies, US$200 billion would be used to buy equities, bonds (including TBs, bonds denominated in yen, Singapore dollars and yuan), and to fund infrastructure projects;
2) Facilitate intra- Asia trade, investment to help cushion from the U.S. and Europe slowdown;
3) Asian SWFs pool US$200 billion to invest in the region's equities and bonds, and finance infrastructure projects.
Philippines' proposal:
Philippines' proposal:
1) 10 ASEAN nations should fund a crisis fund to tap from if they face severe liquidity crunch due to global financial crisis; Fund can also be used to purchase bad assets, recapitalize troubled financial institutions and private companies; ASEAN+3, ADB, IMF will contribute to the fund while World Bank to contribute US$10 billion; also includes plans for stand-by liquidity facilities.
Asian Economic Panel: Cooperation should be in terms of swap lines, coordinated rate cuts, fiscal stimulus, other counter-cyclical policies, crisis monitoring and maintain stable exchange rates versus the USD and Euro.
Challenges: Functioning and management of the fund, stake of different countries, borrowing eligibility and conditions; political consensus, Limited intra-Asia capital mobility due to capital controls, use of USD for transactions, coordination problems, weak and diverse political and institutional structure.
Asian Economic Panel: Cooperation should be in terms of swap lines, coordinated rate cuts, fiscal stimulus, other counter-cyclical policies, crisis monitoring and maintain stable exchange rates versus the USD and Euro.
Challenges: Functioning and management of the fund, stake of different countries, borrowing eligibility and conditions; political consensus, Limited intra-Asia capital mobility due to capital controls, use of USD for transactions, coordination problems, weak and diverse political and institutional structure.
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