Widening of Chiang Mai Initiative

At a summit held on Sunday in Phuket, Thailand, finance ministers from China, Japan, South Korea and the 10 Asean states agreed to create a $120 billion foreign exchange reserve fund to help the members save their currencies from speculative attacks, and also to provide them with emergency short-term financing. The pool was supposedly planned for $80 billion in May but has turned out to be 50% larger than what was planned. The scheme is also a widening of the so-called “Chiang Mai Initiative”, which was launched at the beginning of the decade.

China, Japan and South Korea will supply about 80% of the pool, while the individual contributions of the Asean countries will probably be decided at the next meeting in May.
Meanwhile, bilateral agreements will continue and are being strengthened. On February 21, Japan and Indonesia increased the size of an existing bilateral agreement to $12 billion from $6 billion.

Speculative attacks and capital flight devastated the foreign exchange reserves of Indonesia, Korea and Thailand during the Asian financial crisis a decade ago, prompting recourse to loans by the International Monetary Fund and hence the imposition of IMF “conditionality”.

As a result, the Asian governments decided to build up their foreign exchange reserves, sustained by the revenues from export-oriented economies. And in the past 10 years, the 13 Asian countries have built up more than $3.5 billion of foreign exchange reserves. A large chunk of that is held by the People’s Bank of China, of course, but the total makes up nearly half of the world’s total foreign exchange reserves.