OPINION> Commentary
Crisis to top agenda at ASEAN summit
(China Daily)
Updated: 2008-11-21 07:49

Even with some immunity to the crisis, the roles of China and Japan will be closely watched at the upcoming Association of Southeast Asian Nations (ASEAN) Summit in Chiang Mai, Thailand. Both Asian giants have important roles to play in forging a new regional financial order. The collapse of the US and European financial systems have led many to call for a new global financial architecture to replace the Bretton Woods system adopted after World War II.

Bretton Woods, the relic of post-war reconstruction, gave the US currency - previously linked to gold - the dominant position in the world economy and allowed the US to run a trade deficit without having to devalue its currency. The US does not have to maintain any foreign exchange reserves. The dollar has become the paper reserve currency.

The question is, can the US dollar continue to dominate global financial transactions? Now, confidence in the dollar as well as the euro has been shaken because the US and Europe will take years to repair their financial systems.

Preliminary estimates have put the damage to the capital of the global banking systems at over $600 billion. Of this, $380 billion will account for damage to the capital of the US banks, $220 billion for European banks and $30 billion for Chinese and Japanese banks. The actual cost could rise, probably to $1 trillion.

However, Japanese, Chinese and other Asian banks are relatively healthy amid the financial crisis that has brought down the top names in the US and Europe. As a result, the world's strongest currencies now are in Asia - the yen, the yuan and the Singapore dollar. The yen, in particular, has strengthened remarkably because central banks around the world are converting their US dollars and euro holdings to yen. The Chinese yuan remains inconvertible.

At the G20 Summit in Washington last week, world leaders, under US chairmanship, focused on working on the existing paradigm to tackle the global financial crisis.

But in Asia, there has been a shift toward more regional cooperation. After the 1997 financial crisis, Asian countries learned the dear lesson that they cannot rely on the IMF in bad times. They have started to accumulate foreign exchange reserves to guard against the next round in the financial crisis, which is contagious.

Now, Asia is holding the world's largest foreign reserves, at about $3.5 trillion. Of this, China holds about $1.9 trillion, compared to $1 trillion for Japan and $103 billion for Thailand.

So at the ASEAN Summit in Chiang Mai, scheduled for Dec 13-16, Southeast Asian leaders, plus those from China, Japan and South Korea, will discuss the establishment of a new regional financial order. They will follow up on the $80 billion regional fund approved at the Asia-Europe Summit in Beijing in October. If the leaders of "ASEAN Plus Three" agree to institutionalize the regional fund, they will effectively convert the existing bilateral currency swap agreement into a multilateral foreign exchange agreement.

The size of this regional fund can be expanded later to, at most, $350 billion, representing about 10 per cent of Asia's foreign exchange reserves. If the regional fund were to be eventually institutionalized with $350 billion, it would rival the role of the IMF. It would provide a cushion for Asian countries in times of global financial crisis. This is a course that all Asian countries should embrace as part of a new regional financial order.

The Nation (Thailand)/Asia News Network

(China Daily 11/21/2008 page9)