Asian giants join forces to face currency attacks

ISTANBUL: Japan, China and South Korea joined forces on Tuesday to bolster Asia's defences against attacks on its currencies, setting aside political tensions that had threatened to derail regional economic cooperation.

Finance ministers of Asia's largest economies agreed to closer cooperation on the Chiang Mai Initiative (CMI) - a regional foreign exchange swap pact to combat speculative runs on currencies like those that swept the region in 1997/98.

That sets the stage for their meeting on Wednesday with the Association of South East Asian Nations (Asean) which a senior Indonesian central banker said was likely to approve plans to double the size of the swap arrangement to over $US70 billion ($NZ97 billion).

"We are proposing to double the size. Right now the total fund is $US35.9 billion," Hartadi Sarwono, deputy Indonesian central bank governor, told Reuters.

The success of the plan depends almost entirely on the economic might of China, Japan and South Korea, among the world's biggest holders of foreign exchange reserves.

South Korean Finance Minister Han Duck-soo, who hosted the meeting of three Asian economic powerhouses, confirmed that there were plans to increase the size and scope of the swap pact.

The run-up to the meeting had been overshadowed by speculation about China's plans to reform its yuan currency and diplomatic disputes.
Advertisement
Advertisement

Relations between Japan and China plummeted to their lowest level in three decades in recent weeks over a series of disputes, including Tokyo's treatment of wartime history, which is also a bone of contention in ties with Seoul.

But Japanese Finance Minister Sadakazu Tanigaki said the political rivals would pursue economic cooperation that is crucial to stability in the world's fastest growing region.

"Whatever happens, we need to promote financial cooperation even if there are issues," he said.

ADB officials said the tensions would not affect their role as guarantors of regional financial stability under the five-year-old Chiang Mai Initiative.

South Korea's Han said finance ministers of the Asean+3 wanted to revamp the process of throwing financial lifelines to countries in distress.

"We want a collective decision-making process...more transparency," he said.

Some Asian governments want to turn the web of swaps into a fledgling Asian monetary fund so the region is not dependent on the Western-dominated International Monetary Fund in times of crisis, as was the case in 1997-98.

Asia's massive $US2.5 trillion in foreign exchange reserves, about two-thirds of the world's total, has given the region more economic and political clout on the global stage.

But ADB officials warned that this mountain of hard currency would not always shelter economies from storms such as the Asian crisis in which capital fled the region, wiping away years of development in weeks.

The ADB's chief economist said Asia had even allowed its reserves to grow too large.

"They have grown far beyond what is (the) optimal level. It's basically a reflection of a lack of imagination, a lack of innovativeness and to some extent a lack of self-confidence," Ifzal Ali told Reuters.

Finance ministers and central bankers from dozens of Asian countries are converging on Istanbul for a three-day ADB meeting which begins on Wednesday.

Markets will wait for any comments at the news conference on currency policy, with speculation on a yuan revaluation reaching fever pitch after China's central bank governor said last month there were no serious political obstacles to yuan reform.

Han said the finance ministers from Japan, South Korea and China did not discuss the yuan in any detail.

Investors betting on an immediate change in the yuan regime scrambled to buy the Chinese currency in the offshore forward market in Europe as London dealing rooms re-opened after a market holiday on Monday.

The premium on three-month yuan non-deliverable forwards, derivatives used by foreign investors to bet on a change in China's currency, hit a record high to price in a 2.7 per cent rise in the yuan, which is pegged at 8.28 to the dollar.

China has said changes to its yuan policy would take into account any impact on Asian neighbours, who have been less strident in their demands for currency reform than the United States and Europe.

Beijing and Tokyo have moved to ease tensions after anti-Japanese protests across China last month appeared to threaten economic links worth $US212 billion in annual trade.