Monetary issues top agenda at Asean summit

The roles of China and Japan will be closely watched at the upcoming Asean Summit in Chiang Mai. 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 Two. Nobody knows for sure at the moment what the new global financial architecture will look like. But in Asia, a revolution is underway to change its financial landscape.

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 US$600 billion(Bt21 trillion). 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 G-20 Summit in Washington DC last week, world leaders, under US chairmanship, focused on working on the existing paradigm to tackle the global financial crisis.

The role of the International Monetary Fund should be strengthened. The IMF now has a war chest of $250 billion. But this amount is still not enough. It will need more financial contributions. Both Japan and China have agreed to commit to a capital increase for the IMF. They also would like to play a greater role in the IMF, which represents one of the cornerstones of the Bretton Woods system. The IMF is designed to help countries facing a balance of payments crisis.

But in Asia, there has been a shift toward more regional cooperation. After the 1997 crisis, Asian countries learned the dear lesson that they can't 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 $2 trillion, compared to $1 trillion for Japan and $103 billion for Thailand.

So at the Asean Summit in Chiang Mai, scheduled for December 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 Asem Summit in Beijing in October. If the leaders of "Asean Plus Three" agree to institutionalise 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 institutionalised 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.