TOKYO -- In early May, the Asian Development Bank celebrated its 50th anniversary at its annual meeting in Yokohama, a port city south of Tokyo. Finance ministers and central bankers from the Association of Southeast Asian Nations, China, Japan and South Korea met on the sidelines of the event, but two men were conspicuously -- and tellingly -- absent: Chinese Finance Minister Xiao Jie and People's Bank of China Deputy Gov. Yi Gang.
The theme of the ASEAN+3 meeting was how to strengthen regional financial cooperation through the Chiang Mai Initiative, a multilateral currency swap agreement. Beijing, it seems, is not keen on the idea.
The initiative was proposed in 2000 in the northern Thai city of Chiang Mai in hopes of avoiding a repeat of the 1997 Asian financial crisis. The initial aim was to create a network of bilateral currency swap deals that would act as a financial safety net for the region. In the three years that followed, Japan sealed swap agreements with seven countries, including China, South Korea, Thailand and Indonesia.
In 2010, individual deals inked under the initiative were reorganized into a single multilateral accord. Under this new agreement, signatories promised to contribute to a $120 billion pool of emergency funding that countries can draw from in case of a sudden capital outflow. The pool was doubled to $240 billion in 2014.
The problem is that without approval from the International Monetary Fund, only 30% of the $240 billion can be unlocked. ASEAN has long called for raising the cap and sought to do so amid the festive mood in Yokohama. Japan and South Korea were open to the idea, but China apparently balked, as seen in its last-minute decision not to send its finance minister and deputy central bank chief to the event.
Two by two
Underpinned by regional consensus and mutual respect among its members, the Chiang Mai Initiative has gradually expanded and added new functions over the years.
Last year the ASEAN+3 Macroeconomic Research Office, or AMRO, a unit of the initiative that monitors and analyzes regional economies, was upgraded to the status of international organization, a significant step forward for regional cooperation. Yet multilateral cooperation remains fraught, partly because of thorny political issues, such as those between Japan and China.
For that reason, Japan is trying particularly hard to build more bilateral agreements. Outside the Chiang Mai Initiative, Tokyo has agreed on a two-way currency swap deal with five ASEAN countries worth some $40 billion.
Yet these bilateral agreements are also vulnerable to political and diplomatic vicissitudes. In October 2011, Japan and South Korea increased the size of their currency swap agreement fivefold to $70 billion, but they let the deal expire in February 2015 amid fraying diplomatic relations.
China has also been pushing for more bilateral agreements, mainly in Asia. Taking advantage of its massive foreign exchange reserves, which are now the world's largest, Beijing has expanded an existing agreement with Indonesia and extended ones with Malaysia and Thailand. At the end of 2015, China had deals with 33 countries and territories worth a total of more than 3.3 trillion yuan ($484 billion), according to Japan's Mizuho Bank.
Although China's swap deals are, in principle, set in yuan, the contracts are flexible enough that China can provide a country with dollars if so requested, according to an expert in international finance. Since emerging countries will likely be more in need of dollars than yuan in times of crisis, there is strong demand for China's flexible currency deals.
Both Japan and China are each expanding their networks of bilateral currency agreements in Asia. A bigger pool of foreign currency reserves makes a better safety net against financial crises. But if competition in taking the lead undermines cooperation, those deals may not be as effective as they should be.
Nikkei staff writer Ryo Nakamura contributed to this article.