Chiang Mai Agreement

The Chiang Mai Agreement, also known as the Chiang Mai Initiative, is a set of bilateral currency swap arrangements established at Chiang Mai, Thailand, in May 2000, by the members of the Association of Southeast Asian Nations (ASEAN) with the addition of Japan, China, and South Korea (collectively referred to as “ASEAN+3”). The Agreement is meant to complement the International Monetary Fund (IMF) by providing emergency infusions of foreign currency to member countries suffering from liquidity crises. It also establishes a mechanism to monitor capital flows and economic conditions through regular contacts among financial authorities in the region. Created in the wake of the 1997–1998 Asian financial crisis, the Agreement presents an important example of financial cooperation in the region.

The swap system comprises two main components: an expanded ASEAN Swap Arrangement and a network of bilateral swap and repurchase agreements. The former built upon a 1997 agreement involving five of the ASEAN countries and extended participation to the rest of ASEAN, increasing total reserves to $1 billion. As each participating member can only draw upon twice the amount it has contributed, the economic impact of a swap through this mechanism is likely to be insignificant. The network of bilateral swap and repurchase agreements provides significantly greater short-term liquidity. As of May 2004, a total of $36.5 billion had been pledged in these agreements. Under them, borrowing countries typically receive dollars in exchange for a local currency (an exception being the swap arrangement between China and Japan, which exchanges yen for renminbi) for a fixed period of time (usually three months), after which the borrower can renew the swap or pay it back to the lending country's central bank. Swap agreements can be reciprocal or unidirectional, depending on a country's reserves of foreign currency. For example, under Japan's agreements with the ASEAN states, only the ASEAN states can initiate a swap owing to Japan's large foreign reserves, while the agreement between Japan and China can be activated by either party. The Chiang Mai Agreement is explicitly designed to complement the IMF's lending practice. The activation of a currency swap is contingent upon the drawing state's acceptance of an IMF structural adjustment program, the exception being the agreement between Japan and China.

Critics have raised concerns that deepening regional integration could ultimately supplant international institutions in the region and isolate extraregional states. Moreover, the 1997 Asian financial crisis showed that the region is susceptible to economic contagion, suggesting that liquidity should come from outside the region rather than from within it. Nevertheless, the Chiang Mai Agreement has fueled discussion about deeper cooperation in the future, such [Page 79]as transforming the bilateral swap agreements into a true multilateral institution and creating a unified Asian currency.