Another Asean+3 finance ministers' meeting looms this weekend on the sidelines of the annual meeting of the Asian Development Bank in Kyoto. Among the topics slated for discussion is the further development of the Chiang Mai Initiative, a programme of financial cooperation launched in 2000 during the aftermath of the devastating Asian currency crisis. Over the last few years, Asean central banks have developed a web of bilateral swap agreements with their counterparts in China, Japan and Korea. These arrangements are designed to supplement a member country's foreign-exchange reserves should its currency come under speculative attack.

Officials meeting in Japan over the coming days are likely to take further steps towards bolstering their defences. Among the proposals to be endorsed is the "multilateralisation" of the various swap agreements, in effect creating a pooled fund of foreign-exchange reserves readily accessible by individual countries in times of stress. With bilateral swap arrangements already amounting to US$79 billion (Bt2.75 trillion), smaller Asean countries in particular would gain access to substantial ammunition to deal with an exchange-rate crisis. Setting up a single source for supplemental reserves, moreover, would facilitate access and thereby make the arsenal all the more potent.

When the Chiang Mai Initiative was launched, memories loomed large of the region's central bankers surrendering with depleted coffers to financial market pressure. Bolstering reserves, therefore, appeared a sensible strategy to prevent the repeat of a regional meltdown. But times have changed. Countries in the region hardly suffer from a shortage of foreign-exchange reserves with which to defend their exchange rates. With more than $3 trillion in cash on their hands, Asia's central bankers are in fact wondering what to do with all that stuff.

In a bid to keep their exchange rates competitive, the region's central banks furiously buy up dollars, while continued capital inflows and current-account surpluses only serve to pour more oil on the fire. This leads to a dilemma: the build-up in reserves ultimately fuels money-supply growth across the region, with loose liquidity driving up asset prices and potentially stoking inflationary pressures. By most yardsticks Asian central banks have long surpassed levels of reserve holdings deemed sufficient to counter a potential external-payments crisis. Indeed, the main macroeconomic risks facing the region currently are the consequences of unmanageable balance of payments surpluses, which might spread "Asian crisis style" through the region.

A little taste of what might be in store was provided late last year by Thailand, the country that kicked off the previous regional crisis of 1997. Faced with burgeoning capital inflows and a rising trade surplus, the baht strengthened relentlessly against the dollar even as the central bank massively intervened in the currency market. Unable to absorb the flood of cash pouring into the country, officials eventually pulled the brake and imposed capital controls. These, in turn, contributed to a severe downturn in investor sentiment, from which the country is still recovering. Clearly, the main problem facing Thailand was how to recycle an overwhelming balance of payment surplus, rather than to think about how to bolster reserves further.

So where does Kyoto come in? The purported aim of Asia's finance ministers is to strengthen regional financial cooperation and integration, possibly even providing the first step in a long road towards a single Asian currency. But their endeavour is somewhat misplaced. What Asia currently requires is not beefed-up defences, but more genuine cooperation among its central banks.

Frederic Neumann

Special to The Nation

Frederic Neumann is an economist covering Asia-Pacific for HSBC in Hong Kong.