Since the global financial and economic crisis of 2008, China has launched a well-planned strategy to raise the international profile of the renminbi or the Chinese yuan, taking advantage of the relative decline and weakness of the traditional reserve currencies. A series of recent steps points to a graduated roll-out of this strategy:
(i) A progressively larger percentage of China’s expanding international trade is now being designated and settled in the yuan. Within just a couple of years, this percentage has reached seven per cent and is expanding rapidly.
(ii) A significant yuan-denominated bond market is emerging in Asia. With a successful pilot launch in 2009 in Hong Kong, these instruments, known as “dim sum bonds”, are now also in circulation in Singapore. They are currently 200 million yuans in total value but are growing in popularity. They are likely to be traded in other important financial markets and become a significant tradeable instrument.
(iii) At the G20 finance ministers’ meeting in March this year, it was decided that the yuan should be included in the basket of currencies that the International Monetary Fund (IMF) uses to fix the value of its Special Drawing Rights (SDRs).This is despite the fact that unlike other currencies in the basket – the US dollar, the British pound, the euro and the Japanese yen – the yuan is not a freely convertible currency.
These moves need to be linked to parallel developments in the Asia-Pacific region. In the aftermath of the Asian economic crisis in 1997, Japan proposed the setting up of an Asian Monetary Fund, which would supplement the support provided by the IMF to crisis-hit countries belonging to the Association of Southeast Asian Nations (Asean). Though it was supported by Asean and South Korea, the idea did not progress owing to staunch opposition from the US and the IMF, which did not want to concede any of their authority on global financial issues to any rival regional body. At that time, China was not a major player in this regard, but made its relevance felt by pledging not to devalue its currency, which would have hit the competitiveness of the already weakened Asean economies.
As a less ambitious measure, Asean instead adopted a Swap Arrangement in which five countries, viz Indonesia, Malaysia, the Philippines, Singapore and Thailand, agreed to provide liquidity support to each other through a $200 million fund. In 2000, this was converted into the Chiang Mai Initiative (CMI), with the participation of all Asean countries, China, Japan and South Korea.The CMI’s objective was to “strengthen [their] self-help and support mechanisms in East Asia through the Asean+3 framework”. The CMI worked through a network of bilateral swap and repurchase agreements among Asean and its plus three partners.It had an initial corpus of $1 billion.
At this stage, access to the CMI was linked to a parallel IMF programme for a country seeking liquidity support . In the absence of an IMF facility, a country could only draw up to 10 per cent of its quota amount.
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By April 2009, in the wake of the global financial and economic crisis, the CMI was multilateralised, operating through a “self-managed reserve pooling arrangement governed by a single contractual agreement”. It was agreed that this multilateralised arrangement (CMIM) would:
- address the balance of payments and short-term liquidity problems confronting participating countries;
- supplement existing international financing arrangements; and
- establish an independent surveillance unit to monitor and analyse regional economies and support decision-making within the organisation.
By now, the CMI’s corpus had grown to $90 billion and the amount a participating country could draw from its quota without link to IMF support was raised to 20 per cent.
The next important step was taken in March 2010, when the CMIM raised its corpus to $120 billion, with Asean contributing 20 per cent and China, Japan and Korea picking up the remaining 80 per cent. Each CMIM member is entitled to draw an amount that is a multiple of its contribution. A parallel IMF support programme is not required. The functions of surveillance, monitoring and analysis were assigned to the Asean plus three Macro-Economic Research Office (AMRO).
The CMIM and the AMRO are the final building blocks for an Asian Monetary Fund (AMF), centred around China, Japan and Korea.
It is noteworthy that neither the US nor the IMF has reacted negatively to these latest developments, unlike in 1997 when the Japanese proposal was vehemently rejected. The French, who will be chairing the G20 summit this year, have in fact declared that they will put on the agenda the link and mutual support between the IMF and “regional financing arrangements”.
Taken together with China’s carefully calibrated steps to raise the profile and role of its currency in the Asia-Pacific region, based on the massive size of its reserves, there is little doubt that the arrangements being put in place would be dominated by China.
These developments have major implications for India:
- The process underway would give primacy to the Asean plus three track over the broader East Asia Summit track, which India has been promoting as the main platform for regional economic integration. There is a danger that we will become marginalised in this process.
- India has had virtually no role to play through this evolution of “regional financial arrangements”. If an AMF emerges without India’s participation or role, what will this mean for our own economic engagement with Asia-Pacific?
What are the ways in which India can deal with these emerging challenges?
(i) India should seriously consider joining the emerging AMF as a participating country. Asean countries, Japan and Korea may not be averse to a countervailing Indian presence to offset China’s dominant role.
(ii) We should fast-track our integration with the economies of Asean, Japan and Korea through completing free trade agreement negotiations and implementing comprehensive economic partnership agreements with them.
(iii) We must consult with the US and European Union countries who will also be impacted by these current developments. The US dollar and the euro will remain the major convertible currencies globally. It may be in our interest to work together with them to create a more balanced and truly global financial architecture.We need to work out a coping strategy before we head to the next G20 summit.
The author is a former foreign secretary and currently chairman, Research and Information System for Developing Countries and senior fellow, Centre for Policy Research