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Foreign Exchange

Asia: Chiang Mai Initiative expanded

The 10 members of the Association of Southeast Asian Nations (Asean), together with Japan, China and South Korea, agreed in late February to create a $120 billion pool of foreign exchange reserves. The fund is intended to act as a buffer for members by providing short-term financing, as well as helping to ward off speculative attacks on their currencies.

The new arrangement is a widening of the Chiang Mai initiative, which was established after the 1997/98 Asian crisis. It established a mechanism that enabled bilateral FX swaps between Asean members, as well as Japan, China and South Korea. The initiative has met, at least initially, with a good response.

Backstop

"The measure is in stark contrast to other emerging market regions that are not blessed with Asia’s surplus savings," says Patrick Bennett, Asia FX and rates strategist at Société Générale Corporate & Investment Banking. "The initiative speaks to ongoing and improving cooperation and policy maturity here in Asia. Still, while the pool will provide a backstop to speculative attacks on currencies and help in some cases to soften the impact of a swift withdrawal of capital that has potential to dislocate local markets, it will not in and of itself prevent further modest currency weakness – as remains appropriate in the weeks and months ahead as economies face further curtailment of external demand."

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