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The Chiang Mai Initiative: China, Japan and financial regionalism

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In Brief

On the 3rd of May, the ASEAN + 3 Finance Minister’s Meeting (APT-FMM) met in Bali. Expectations were high that, at last, an agreement might be reached on the multilateralization of the Chiang Mai Initiatives, or CMIM. An agreement, were it reached, would allow the members of the CMI to tap a regional pool of Foreign Exchange Reserves to better fend off a financial crisis.

Yet, ever since the agreement to proceed with multilateralization was reached at the 2005 Hyderabad Conference, the CMIM has faced difficulty in reaching a decision about contribution levels. This problem was political; boiling down a simple question of whether China would succeed in persuading Japan to accept an ‘equal firsts’ solution, or whether Japan would succeed in making its case that it should to be the largest single contributor.

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The results are in, and miraculously both Japan and China have got their wish. Japan will contribute 32per cent of the total to the CMIM, or US$38.4 billion of the US$120 billion pool. The PRC will contribute 38.4b in total; US$34.2b from the mainland and US$4.2b from Hong Kong, China. Thus, Japan is the ‘single largest single contributor’ while at the same time the PRC (including Hong Kong) and Japan are the ‘largest co-equal contributors’.

This agreement is a symbol of how far China has come since the beginning of its charm offensive a decade ago. The phenomenon of China’s rise, and the consequent eclipsing of Japanese power, is also on display. Compared to the other regional institutions it had joined earlier such as the Asian Development Bank, China’s presence (and potentially its formal voting weight) as a ratio of that of Japan’s has increased from under a half to near parity.

This agreement is also significant because as CMIM becomes increasingly institutionalized, it will need to have put in place a sound decision-making process for the provision of funds in a crisis. There is already a basic consensus within the CMIM that this decision-making should be made on a weighted voting system, similar to the IMF. If this is the case, then it is likely that the schedule of contributions agreed at this years APT-FMM will roll over into voting weight, with perhaps a percentage of the voting weight being equally distributed. Independent of any adjustments made, it is clear that China and Japan will together be able to approve, or block, any application to the CMI. There is, therefore, the possibility that these two powers will learn to cooperate with each other within the confines of a regional institution, even when bilaterally relations are tense.

Problems still remain.

In the first instance, there is still a possibility that the CMIM will flounder during the negotiations over the founding documents. In particular, there remain significant differences between China and Japan over issues of economic surveillance. In November of 2001, a Japanese Ministry of Finance backed proposal for a surveillance facility at the CMI was flatly rejected by China, leading to the creation of the a less formal mechanism, the Economic Review and Policy Dialogue (ERPD) in April 2002. In 2005, participation in the ERPD process became a condition for release of funds from the CMI. But despite such strengthening the ERPD is still incapable of providing the level of economic surveillance, monitoring let alone due diligence after disbursal. In fact, the ERPD process is apparently mostly prized as an opportunity to discuss with China events happening within its border.

There is also the related problem of where to establish the CMIM’s secretariat. Prior to multilateralization, the CMI process as a network of Bilateral Swap Agreements did not require a secretariat – in fact, the reason for this network approach was to sidestep this issue. Now it will need to be faced. It is unlikely that the default option of nesting the CMIM secretariat within the ASEAN secretariat will work this time around. Not only are the costs of running the CMIM secretariat likely to be high, but is it unlikely that ASEAN can provide the technical elements required. In addition, compared to previous attempts at regional coordination by ASEAN, the Northeast Asian countries collectively have got a lot more at stake, Northeast Asia having contributed 80 per cent to the total. This leaves the ADB, which has been active in promoting the CMI process from the outset, or the creation of new separate secretariat. In fact, a decision on where to place the CMI secretariat was due in December 2008, but no conclusion was able to be reached. It is an important decision because it will affect the locus of regional economic cooperation more broadly.

The need for greater financial cooperation in Asia has been brought into sharp relief by the global financial crisis. Indeed, it seems likely that the agreement reached last week between China and Japan was only made possible because of this external shock. Where the CMIM goes from here is not set in stone but the trajectory over the short term is clearly towards further institutionalization.

3 responses to “The Chiang Mai Initiative: China, Japan and financial regionalism”

  1. What a fascinating and splendid outcome that starkly illustrates the changing world order!
    Can’t help thinking we need more problems like this and less of the financial contagion kind.

  2. I’d like to propose a new voting mechanism. I work for the Australia federation and there are eight state level governments in Australia. In our work, we often are faced with the question: what is the average policy of the states in a particular area? The following thought has benefited from that work.

    The agreement between China and Japan is helpful in progressing the CMI cause and should be congratulated. It is, however, still in the confine of the traditional “power” representation of politics and governance. There is no “breakthrough” in thinking to combine the “representative style” of the IMF voting mechanism and the somewhat more “senate style” voting mechanism of the United Nations. The latter is more reflective of equal rights for every nation, irrespective they are big or small, although it can suffer its own shortcomings.

    An alternative to either of those mechanisms is to have a voting mechanism combined both. Half of the votes will be decided by the representative style votes based on economic contributions and the other half by an equal vote of every member. This will give the community more humanitarian flavour and also recognise the economic reality and accountability.

    In fact this voting mechanism, if adopted, could be better than or superior to the current parliamentary system of two separate chambers, with the requirement that both have to pass in majority. Indeed, some of the parliamentary dramas in the Australian system where a minority senator can hold the whole parliament and the nation as “hostage” have shown some of the serious shortcomings with that system. Maybe one day they will be reformed.

  3. Responding to Lincoln,
    Drawing comparisons between the domestic political realm and international financial institutions is fraught with risk. If half of the CMI’s voting weight were to be equally distributed then the ASEAN 5 countries would have more than 40% of the total. It also means that if Korea votes with the ASEAN, then even China and Japan together could not block it.

    I can not see this being allowed to happen by either China or Japan. Especially, as the Northeast Asians have conditioned the better part (80%) of any country’s CMI activation on the IMF approving a stand-by agreement. Any percentage ‘handed over’ to the ASEAN 5 will be purely symbolic and not effect the underlying ability of Japan and China to block disbursement. Moreover, given the tradition within asian insitutions for consensus decision making, the theshold for approval likely to be set high enough that either China or Japan can block.

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