The new scheme has been rapidly approved as countries across
East and Southeast Asia look to shield themselves from the financial
volatility unleashed by US President Donald Trump’s global tariff war, which
has triggered turbulence in the US Treasuries market and an Asian currency
rally in recent days.
It may also herald a deeper, longer-term shift towards a
regional monetary mechanism that is less reliant on the dollar – and gives
China a bigger role.
In this explainer, the South China Morning Post breaks down
the details of the new financing mechanism, and what it means for the future of
Asia and the dollar-based global financial system.
What is
behind this decision?
The new rapid financing mechanism is part of a broader
scheme known as the Chiang Mai Initiative Multilateralization (CMIM) – a currency
swap arrangement among the 10-member Association of Southeast Asian Nations
(Asean), China, Japan and South Korean.
The CMIM has its origins in the aftermath of the Asian
Financial Crisis of the 1990s. It is designed to prevent a repeat of that
crisis by providing emergency help to countries facing balance-of-payments
issues and short-term liquidity difficulties.
The 13 member countries – collectively known as Asean+3 –
first began setting up a network of bilateral currency swap arrangements in
2000, then the scheme expanded and evolved into the CMIM a decade later.
The
lending capacity of the CMIM has since risen the US$240 billion, with Japan and
China each contributing US$76.8 billion, South Korea US$38.4 billion and the 10
Asean countries a combined US$48 billion, according to the Asean+3
Macroeconomic Research Office.
To date, none of the member countries have ever requested
CMIM funding.
What was
decided on Sunday?
During a meeting of finance ministers and central bank
governors from the Asean+3 nations in Milan, Italy, on Sunday, the attendees
approved a new tool for providing swift financial help to economies facing
urgent balance-of-payments issues called the CMIM Rapid Financing Facility.
Unlike previous mechanisms, which relied on the US dollar,
the new facility will use the Chinese yuan and other regional currencies.
The yuan had been approved for use as a transaction currency
in the CMIM pool just weeks earlier, during a meeting of the Asean+3 deputy
finance ministers and central bank governors in April.
A joint statement released at the Milan meeting noted that
the new facility was designed to “enhance regional resilience by offering
members timely access to emergency financing during urgent balance of payments
needs, in response to sudden exogenous shocks such as pandemics and natural
disasters”.
In a press release published on Monday, China’s central bank
governor Pan Gongsheng hailed the move as “a breakthrough in diversifying the
international monetary system in the region” amid a period of global
uncertainty.
In Milan, the financial officials also agreed to explore
further improvements to the CMIM in line with the International Monetary Fund
framework – a move seen as a step towards institutionalizing the initiative and
making it more effective.
What it
means for the US dollar?
“Yuan’s inclusion in the CMIM system reflects growing
acceptance of the currency on the global stage and marks a step forward in its
internationalization,” said Ding Shuang, chief Greater China economist at
Standard Chartered Bank.
The move comes as Beijing accelerates its efforts to expand the
yuan’s global influence by encouraging the use of the Chinese currency in trade
settlement, commodity pricing and foreign exchange reserves.
Chinese authorities have also tried to boost cross-border
use of its digital yuan through Project mBridge, a scheme launched in
collaboration with the central banks of Hong Kong, Thailand, Saudi Arabia and
the United Arab Emirates.
Ding, however, noted that the significance of the yuan’s
inclusion in the CMIM was mainly symbolic, given that the mechanism has never
before been activated and the member countries already had sufficient foreign
exchange reserves.
“At this stage, the inclusion of the yuan is more of a
structural move, and we will only see the actual impact when the CMIM funding
pool is truly activated,” said Ding.
