Dr. Chang Junhong, AMRO Director
Dear Vice President Li Peilin, President Park, Director Zhang, Ladies and Gentlemen,
Let me start by thanking Professor Zhang Yuyan, Director of the Institute of World Economics and Politics (IWEP) at the Chinese Academy of Social Science (CASS), for the kind introduction. I would also like to thank Mr. Li Peilin, Vice President of CASS, for giving me the opportunity to share my views with all of you.
It is a great privilege and honour for me to address this forum. CASS is my home school from where I graduated and completed my Ph.D. A couple of professors and researchers present here today have been my tutors and teachers. Additionally, there are some eminent scholars around the table whom I greatly respect: Dr. Chalongphob, and Professor Anwar Nasution, Professor Kawaii, Professor Yoshino, Professor Gao Haihong, who have all been advocating regional financial cooperation initiatives from its outset. I would also like to pay a special tribute to Mr. Wei Benhua, who served as the first Director of AMRO (ASEAN+3 Macroeconomic Research Office) back in 2011 and 2012, and made a tremendous contribution to the institutional build-up of AMRO.
Today, in my new capacity as Director of AMRO, a regional surveillance organization, I would like to share some thoughts on how to push forward East Asian regional financial cooperation. I will take stock of the status quo of regional financial cooperation first, and then address three issues that are essential to its further development,
(1) the significance of CMIM and AMRO from a regional and global perspective;
(2) some pressing issues related to the development of the CMIM and AMRO; and
(3) what AMRO can and will do.
Taking stock of the status quo
First, let us take stock of where we stand now. Our current regional financial arrangement – the Chiang Mai Initiative Multilateralisation (CMIM) – came into existence in 2010, superseding the former Chiang Mai Initiative. It has two main objectives: serving as a self-help mechanism to address balance of payments and/or short-term USD liquidity difficulties in the ASEAN+3 region; and complementing existing international financial arrangements. The CMIM was further upgraded in 2014 to include a crisis prevention facility, and its size doubled to USD240 billion.
The ASEAN+3 authorities share the understanding that independent regional surveillance is the key for such a self-help mechanism to work. This is because such a 3 mechanism needs to be supported by a team of professional economists who can undertake constant surveillance of the member countries and provide assessments of the macroeconomic and financial risks facing these countries. In the event of a balance of payments crisis, the team should have the capacity to develop macroeconomic policies for the country that can close the financing gap.
AMRO was set up in 2011 to provide that support. Its function is to conduct surveillance during peacetime and to provide the macroeconomic policy recommendations that are needed in order for the CMIM to operate successfully. Initially established as a company in Singapore in 2011, AMRO was re-established as an international organization with full legal personality, effective from 9 February 2016.
1. Regionalism: the significance of CMIM and AMRO from a regional and global perspective
CMIM and AMRO are direct products of ASEAN+3 regional financial cooperation, and they provide a way to respond to global and regional challenges, and to promote economic development.
Asia is now well-positioned as the growth engine of the world economy. Our region accounted for less than 30 percent of world output in 2000, but the share increased to almost 40 percent in 2014, according to the IMF. Our regional interdependence has also deepened in recent years. For instance, of Asia’s total exports, over half (or 52 percent) were to Asian markets in 2014, according to the WTO. In particular, East Asian countries are closely interconnected as a production hub in the global supply chain network. Going forward, East Asia is evolving into a global mall and a final market for consumer goods given the rapidly growing middle class. We have benefited greatly from Asian regionalism, originally driven by market forces in the region and increasingly been supported by regional trade agreements and other forms of cooperation.
But as always, there are downside risks. We are living in a world in which a disruptive surge in financial volatility could occur at any time. Furthermore, U.S. interest rate hikes – the speed of which is uncertain – could lead to greater volatilities. Contagion and spillovers from just one country in our region can devastate the region as a whole. The memories of the Asian Financial Crisis of 1997 are still vivid in the region, and the socalled “IMF stigma” still lingers here. The Global Financial Crisis of 2008 was another wake up call for us to further strengthen our regional self-help mechanism and gave birth to the CMIM in its current form.
In short, the CMIM and AMRO together are our regional response to these global challenges. This self-help mechanism is designed to address the negative risks while 4 anchoring the region’s collective interest. In my view, it is also contributing to global financial stability.
Let us now view the CMIM and AMRO from a global perspective
The ultimate objective of the international monetary system has always been to contribute to broader global economic and financial stability. The IMF is required to exercise oversight of the international monetary system, focusing on exchange rates and external stability.
But given the increased frequency of banking and currency crises in the post-Bretton Woods era, the international monetary system has not been able to meet its primary objective. The recent Global Financial Crisis revealed its shortcomings. Actually, in my view, the Asian Financial Crisis of the late 1990s had also revealed some shortcomings in the international monetary system. Indeed, these two crises have acted as a catalyst for reform of the international monetary system and the IMF.
Following the Global Financial Crisis of 2008, how to build a robust Global Financial Safety Net (GFSN) has been one of the top priorities of the international monetary system’s reform agenda. In fact, G20 Leaders have repeatedly highlighted the importance of the GFSN.
The GFSN comprises four components: foreign reserves, bilateral swap arrangements (BSAs), regional financial arrangements (such as CMIM) and IMF resources. While each of the GFSN components has its merits and demerits, the system as a whole remains fragmented.
It is important to note that a single component may not provide sufficient insurance in the event of a crisis. This has led to an understanding that effective cooperation between the different layers of the GFSN
– particularly cooperation between the IMF and the regional financial arrangements
– is very important; and it may also help address issues such as ‘facility shopping’ or ‘duplication of functions’. Indeed, an important role of the CMIM and AMRO is to complement
Indeed, an important role of the CMIM and AMRO is to complement existing international financial arrangements. In this sense, CMIM and AMRO may go beyond their regional mandate. As an integral part of the GFSN, a successful CMIM and AMRO also help build a strong and well-functioning GFSN, in harmony with the other components of GFSN. This, in turn, will help ensure stability in the world economy.
2. Some pressing issues related to the development of the CMIM and AMRO
While the CMIM and AMRO have evolved significantly in recent years, there are a few pressing issues which deserve attention and in-depth thinking before the two institutions can move to the next level of development.
The first is adequacy of resources. Given the magnitude and volatility of capital flows in the region, some observers have raised doubts on the adequacy of CMIM’s resources and the members’ maximum swap quota. In particular, they are concerned about the adequacy of the IMF de-linked portion, which is fixed at 30% of the maximum swap quota. In this regard, whether the IMF-delinked portion should be increased from 30 percent to 40 percent is a pending issue at the moment.
The second is procedural uncertainty. Despite the members’ best efforts to ensure that the CMIM is operationally ready, a few critics have raised questions over the CMIM’s activation procedures – in other words, whether CMIM liquidity support is available for disbursement under due process when a member makes a request. Besides, a coordination procedure has not been established with the IMF, despite the fact that the full utilization of each member’s swap quota is linked with an IMF program.
The third is conditionality. The authorities are still discussing the conditions under which the CMIM facilities are to be activated, keeping in mind the lingering stigma in the ASEAN+3 region. The stigma is partly due to conditionalities imposed by the IMF programs during the Asian crisis period. But at the same time, it is noted that there have been calls from regional and global groupings for the CMIM to require safeguards to avoid issues of facility shopping and moral hazard.
And lastly, institutionally, the CMIM lacks a permanent secretariat. Instead, this function is being performed by the two Coordinating Countries which run the CMIM on a rotational basis, one from an ASEAN member state, and the other from among China, Japan or Korea. While this arrangement brings the benefit of instilling regional ownership, it also makes it more difficult to accumulate institutional memory and can thus hinder smooth operations in a real situation.
How then, can we address these main challenges?
First, over the next two years, the CMIM will undergo a periodic review of the adequacy of its resources and swap quotas, as well as the key terms and conditions of its facilities. AMRO will do its part with enhanced expertise to support the next review which is due in 2018.
Besides the periodic review process, we can think about an interim measure to address the potential shortage in resources. One way to do this is to put together other components of GFSN, for instance central bank bilateral swap arrangements (BSAs), to fill the resource gap. The issue of an increase in the IMF de-linked portion has been intensively discussed by ASEAN+3 authorities.
Second, the issue of procedural clarity – in my view – arises partly from the CMIM’s strict confidentiality rule. We have worked hard to improve the procedures and operational readiness of CMIM. We have adopted and revised the Operational Guidelines, checked members’ compliance with the CMIM’s legal and institutional requirements – the ‘CMIM peacetime checklist – and conducted a number of Test Runs to test its operational readiness.
I hope that a coordination mechanism with the IMF can be developed through the test run in the second half of 2016. In this regard, it is also timely to study how the CMIM can be better integrated into the global financial safety net, as instructed by Ministers and Governors at their meeting in early May. I would like AMRO to contribute to this study after consultation with the member authorities.
The third is the question relating to conditionality. It is well-noted that CMIM has a basis to impose conditionality for its facilities. But its contents have yet to be determined. One consideration is that we need to strike a balance in formulating the CMIM’s conditionality policy, while being mindful of the lingering IMF stigma in the region, and at the same time, of the need to minimize moral hazard.
Lastly, while AMRO has not been officially designated as a secretariat to CMIM, it has already assumed a substantial secretariat role for the CMIM thus far. With its permanent staff and facilities, AMRO is well positioned to take on more secretariat responsibilities for CMIM operations. It can ensure that CMIM is operationally ready to play its role in meeting the needs of the members in the event of balance of payments and/ or shortterm liquidity difficulties. The AMRO Agreement mandates that AMRO is required “to support members in the implementation of CMIM”. In this regard, I hope AMRO can be a ‘Crisis Manager’ within its mandates.
3. What AMRO can and will do.
AMRO still remains a relatively modest organisation in terms of its budget and staff size. And despite the surveillance work done by AMRO over the past four years, little is known about the organization outside the ASEAN plus 3 official circles, partly due to a strict disclosure policy.
As AMRO Director, my vision is to develop AMRO into an independent, professional and reliable regional surveillance organization in support of CMIM, armed with its own resources of highly competent staff and unique value proposition, and to provide regional public goods in order to safeguard economic and financial stability in the region and contribute to regional cooperation and prosperity.
To achieve this, my business priorities lie in making AMRO a Trusted Policy Advisor by becoming a premier international organisation for regional macroeconomic and financial surveillance, a Competent Crisis Manager by enhancing our crisis management capabilities in support of CMIM. In doing so, AMRO will also aim to become an In-house Consultant providing training and technical assistance to build-up regional capacity in macroeconomic surveillance. At the same time, we must work effectively and efficiently. For this, we aim to make AMRO a lean, competent, and result-oriented institution.
I would also like to enter into partnerships with other IFIs, think tanks and the private sector to promote AMRO’s international status and increase its visibility.
We at AMRO are working on the development of our Medium-Term Strategic Vision and Business Plan which aims to provide the blueprint of the goals, business priorities, work plans and deliverables for the next three to five years. Everything that I have mentioned earlier will be incorporated into the Medium-Term Strategic Vision and Business Plan which will be submitted to our Executive Committee for discussion and approval at the end of this year.
Let me now conclude.
I am sure that enhanced regional financial cooperation has been and will be in the interest of all members of the East Asian community of nations. Solidarity and collective actions are essential for safeguarding the financial stability of this region. Regionalism rather than unilateralism is the optimal choice for all.
The CMIM and AMRO together will continue to serve as vehicles to mobilize the political consensus and push forward the progress in regional financial cooperation.
Although the CMIM may have some shortcomings, we are working hard to address them and improve its operational readiness. It is imperative that we do not wait until the next crisis to further improve the CMIM. I hope we can demonstrate that we are really serious in providing a strong financial safety net for the region. There is much room to 8 enhance AMRO’s surveillance capacity and increase its service and influence in this region.
Finally, I would like to once again express my deep appreciation to the IWEP and the CASS for inviting me to address this gathering today. I believe that today’s conference will provide valuable guidance for AMRO’s and CMIM’s future. I am eager to hear the views and recommendations of all the participants gathered here today.