An Asian Monetary Fund could detect storm clouds on the horizon
The little vaunted "Chiang Mai Initiative", recently taken by 14 Asian countries to help each other stabilise their currencies when they are in danger, might yet turn out to be an important political, as well as economic, event.
Thailand was an appropriate venue for the gathering, since it was the battering of the baht that ignited the series of currency depreciations. Expectations before the meeting that it might lead to the establishment of an Asian Monetary Fund were too high. Instead, Japan, China, South Korea, Thailand and 10 Southeast Asian countries hatched a plan to help any neighbour that may again be financially felled.
Japan's finance minister Kiichi Miyazawa said the agreement would eventually include a bilateral swap and repurchase agreement among the richer countries and Asean members. The plan calls for adding Brunei to the existing US$200 million swap arrangement set up in the 1970s, which was, of course, a mere drop in the bucket. That sum will have to be increased dramatically and the idea is eventually to make support available to Cambodia, Vietnam, Laos and Myanmar.
Japan proposed an AMF in 1997, only to be rebuffed by the US, which was worried it could undermine the programs of the IMF. That helped foster bitter complaints that the agency was throwing petrol over bush fires, while top agency officials trampled over political sensibilities with hob-nailed boots. It was only natural for some recipient countries to be pained by the perception that they were handing over significant sovereign power to a Washington-based entity.
There is nothing inherently silly about the notion of an Asian Monetary Fund. The financial firepower of Japan, combined with South Korea, mainland China, Hong Kong and the collective clout of their smaller brethren is considerable. Moreover, an AMF might detect storm clouds gathering and give a warning to batten down before the typhoon arrives. The Chiang Mai participants envisage a network of "contact persons" to share information on currency flows. That could only mean closer ties between Asian finance ministries and therefore governments.
It will be recalled that the cream of Western bankers and bureaucrats were swilling cocktails and munching canapes at the Hong Kong IMF-World Bank meeting in September 1997 when the roof fell in.
There is little to show any greater prescience about future Asian currency movement. For over two years, investment bankers, brokers and market economists have been confidently predicting an imminent devaluation of the Chinese renminbi. They seem unimpressed that the PRC has over $270 billion in foreign reserves, foreign investment is picking up again, and exports were running 40% up in the year to the end of March. China went into the crisis with a cheap currency, deflation at home helped keep export prices down, and policy makers were not blind to the fact that a devaluation would simply trigger a round of beggar-my-neighbour depreciations around the region.
Last month, China's central bank allowed the renminbi to inch below the effectively fixed level of 8.28 to the dollar, thus widening the band within which it can trade. Some commentators pounced on the development as a sign that China might be limbering up for a devaluation to cushion the shock once it enters the WTO. Instead it seems more like a demonstration of confidence. On the available evidence, the Chinese currency is more likely to rise than to fall.