Finance ministers of ASEAN countries and China, Japan and South Korea (ASEAN+3) have agreed to arrange an $80 billion pool in Asian foreign exchange reserves to prevent any financial crisis.

Analysts said the move is an important first step for the region to set up a regular mechanism to ward off potential financial crisis in the future.

Initially, China, Japan and South Korea will contribute 80 percent of the pool while the 10 members of the Association of Southeast Asian Nations will make up the rest, the ministers said in a statement after a meeting in Madrid on Sunday.

The move carries forward the 2000 Chiang Mai Initiative in the wake of the Asian financial crisis. The same nations had then vowed to strengthen financial cooperation, including sharing financial information, foreign exchange reserve swap, mainly on bilateral basis, for use when necessary to fight speculative attacks, and expansion of trading in Asian currencies.

"The move is highly significant as it helps prevent potential financial crises from spreading," said Zhao Xijun, finance professor of the Renmin University of China. "It is also a broader, higher-level arrangement than the current one since it is multilateral."

Through the arrangement, the countries involved would have extra funding to protect their currencies from speculative attacks like the ones during the Asian financial crisis a decade ago, when currencies of some Asian economies depreciated sharply and their financial systems seized up.

It is similar to the International Monetary Fund (IMF) mechanism, Zhao said, but may not have as many mandatory prerequisites as the IMF when crisis occurs.

"The new arrangement should have much easier conditions for any bailout," said Zhuang Jian, senior economist with the Asian Development Bank (ADB) in Beijing.

Asian economies that were battered during the 1997-98 financial turmoil were forced to adopt harsh economic policies in exchange for bailouts by the IMF and other international organizations.

Although the capital pool is not very big, it is a good start, said experts. "Its value lies in the effort to create a regular mechanism to anchor the regional market and prevent the recurrence of the Asian crisis," said Zhao from Renmin University.

"If the mechanism operates well, there could be a new arrangement (for increasing the funding)," said ADB's Zhuang.

Apart from stabilizing the regional market, the new fund is an important step for the countries to form their own cooperation mechanism to cope with common financial challenges, Zhao said.

Canada, the US and Mexico launched the North American Free Trade Agreement in 1994 while the European continent has formed its own economic bloc.

"Asia also needs to have its own mechanism to ensure regional economic and financial stability," Zhao said.

(China Daily 05/06/2008 page14)