Chang Mai Initiative (Background)After the Asian Financial Crisis (AFC) in 1997-98 many Asian countries used huge bailouts from the International Monetary Fund (IMF) to help restore economic equilibrium. Many Asian countries were frustrated by their limited power engaging with the IMF. A stigma in Asia still exists surrounding the IMF due to its reaction during the AFC. Before the Chiang Mai Initiative was created, the original five ASEAN countries created a reciprocal currency swap with a maximum total of $100 million in August 1977. In 1978, this was increased to $200 million. When the AFC hit, though, this amount was not enough to help any of the ASEAN countries. 1

The Chiang Mai Initiative (CMI) was created in 2000 by expanding on these bilateral currency swaps and including China, Japan, and South Korea. The idea was to supplement the existing financial facilities of the IMF for countries included in the CMI. In 2008, when the Lehman Brothers collapsed, none of the ASEAN plus 3 members used the liquidity provisions of the Chiang Mai Initiative. Korea turned to the US Federal Reserve for a $30 billion line of credit instead of using its $23 billion swap arrangements with the Chiang Mai Initiative. The Fed also extended $30 billion lines of credit to Singapore and Japan. 2

The CMI was multilateralized in 2009 to become the CMIM, a pooling arrangement with a single contract. ASEAN countries contributed 20%, while the North Eastern countries contributed 80% --16% by Korea and 32% each by Japan and China (including Hong Kong). The CMIM came into effect on 24 March 2010 with $120 billion. In 2011, AMRO (the ASEAN+3 Macroeconomic Research Office was set up. In 2012, the CMIM was doubled to $240 billion. The CMIM Stability Fund was created to provide short-term liquidity support to address sudden and temporary shortages. It was also agreed that a country could draw up to 30% of its quota without being tied to IMF conditionality. 3

Current Status

The CMIM is a common liquidity pool, in reality there is no centralized fund and the contributions remain in the central banks of their member countries. CMIM, therefore, is a series of promises to provide funds. In the case of a crisis, member governments can swap local currency for US dollars from this pool. Borrowing quotas for each country are based on their contribution multiplied by its respective borrowing multiplier, conditions for securing a swap include a completed review of financial situation, compliance with covenants, submission of periodic surveillance reports, and participation in the ASEAN+3 economic review and policy dialogue (ERPD). These conditions are not difficult, but quite time consuming, and must be met before a final executive decision-making process. 4

1 http://asiancenturyinstitute.com/economy/248-chiang-mai-initiative-an-asian-imf

2 http://csis.org/files/publication/1001q_asia.pdf3 http://www.nbr.org/publications/asia_policy/preview/AP11_CMI_preview.pdf4 http://asiancenturyinstitute.com/economy/248-chiang-mai-initiative-an-asian-imf

CMIM wants to drop its IMF conditionality, but would need a stronger AMRO to establish effective surveillance detecting early risks, constantly monitoring economies, and providing its own conditionality. 5 Another possibility for advancing CMIM is adding Australia and India to its ranks since financial stability is a common interest. Letting go of the IMF stigma from the past could help CMIM engage IMF to help them establish a more advanced and independent program, rather then shunning their help because of past mistakes during the AFC. 6

Participants: Country / Contributions (US $ Billion) / Borrowing Multiplier

China and Hong Kong / 38.40 / 0.5Japan / 38.40 / 0.5South Korea / 19.20 / 1Indonesia / 4.77 / 2.5Thailand / 4.77 / 2.5Malaysia / 4.77 / 2.5Singapore / 4.77 / 2.5Philippines / 3.68 / 2.5Vietnam / 1.00 / 5Cambodia / 0.12 / 5Myanmar / 0.06 / 5Brunei / 0.01 / 5Laos / 0.03 / 57

Relationship to Asian Development Bank

The Asian Development Bank (ADB) is a multilateral development financial institution, which provides financial assistance to developing member nations in the Asian Pacific region. It was founded in 1966 and is headquartered in Mandaluyong, Philippines. The ADB gives loans, technical assistance, grants, guarantees, and equity investments financed through capital resources, special funds, and trust funds. It also offers policy dialogue. 8 ADB in relation to CMIM has released papers about how CMIM can improve as an institution and help regional financial stability. 9 The ADB has also helped put together conferences with presentations about the CMIM discussing strategies to help it grow and stressing its importance in helping to build financial safety nets to prevent future crises. 10 The ADB and CMIM have very similar objectives promoting regional

5 http://www.amro-asia.org/6 http://www.eastasiaforum.org/2010/03/23/the-chiang-mai-initiatives-multilateralisation-a-good-start/7http://www.adbi.org/files/2010.07.13.wp230.chiang.mai.initiative.multilateralisation.pdf8 http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=8740219 http://econpapers.repec.org/paper/risadbiwp/0403.htm10 http://www.businesskorea.co.kr/article/3032/asian-capital-market-cmim-based-cooperation-should-be-enhanced-address-increasing

financial security through different initiatives. If the CMIM takes the ADB’s advice moving forward, regional financial security could potentially improve a great deal.