This breach has been filled somewhat by the US Federal Reserve, which during Covid-19 has offered developed Asian central banks (Japan, Korea and Singapore) with much needed access to dollars, the world’s reserve currency, and also expanded access to other central banks in the region which are now able to access scarce dollars by swapping their holdings of US Treasuries as collateral.
Given ASEAN’s openness to trade and investment, both under pressure during the current crisis, the ability of central banks in the region to access dollars via the Fed is perhaps more palatable than knocking on the door of the IMF. There is an important distinction in the mandate of the Fed and the IMF, of course. The former is only able to offer a short-term palliative by way of dollars. A full-blown financial crisis will still require the intervention of the IMF, a road that countries in the region would like to avoid at all costs.
The initiation of the CMIM is also caught up in regional politics by way of competition between China and Japan for regional supremacy. By any yardstick, China appears to have an advantage over Japan because of its growing size and economic influence within ASEAN. It was Japanese bureaucrats in the Ministry of Finance and Bank of Japan who were the original architects of the CMI, the putative AMF, and Tokyo must resent Beijing’s clout.
To counter the influence of the dollar, China has also encouraged the use of the renminbi (RMB) in trade transactions and has signed bilateral currency swap arrangements (separate from the CMI) with 35 central banks globally, including several from ASEAN. Although the renminbi is not fully convertible, a major hurdle preventing it from becoming a true reserve currency, Beijing is hoping to draw a sizeable number of nations in Asia into its sphere of economic influence and reduce the dependence of the dollar. This potentially places China in direct conflict with the purpose of the CMIM, or at a minimum dilutes the role and objectives of the multilateral swap arrangement.
In a future crisis, will an ASEAN central banker find it easier to access RMB via a bilateral swap arrangement with the People’s Bank of China, or take a more circuitous and politically perilous route via the CMIM and the IMF?
ASEAN policymakers need to address these ambiguities if they want their regional safety net to operate effectively. One way of achieving this is by accelerating regional financial integration (RFI). Since its inception, ASEAN has taken commendable steps in reducing barriers and in positioning the grouping as one of the world’s most dynamic trade blocs. Replicating this in financial integration is proving to be more difficult not least because ASEAN members are at different stages of economic development – with advanced Singapore at one end of the spectrum and low-income Myanmar, Laos and Cambodia on the other.
Reconciling the conflicting financial policy objectives was never going to be easy but ASEAN leaders have at least begun to shape an ASEAN Economic Community (AEC) where the centrepiece is supposed to be regional financial integration. Over the long term, the effectiveness and utility of a regional safety net like the CMIM will be considerably enhanced if ASEAN members take the difficult step of integrating their financial sectors and capital markets, and in figuring out innovative ways of financing regional infrastructure.
For now, the CMIM’s objectives appear frozen in a different era – in the policy missteps and bad memories of the Asian financial crisis over two decades ago. Refreshing the CMIM’s purpose and bringing it closer to the ASEAN vision of a true economic community will go a long way in answering the prickly question of why the swap arrangement has never been used.