Europe, Asia Ask China to Help Save the World

There are good reasons why you probably haven't heard of the Asia-Europe Meeting (ASEM). Aside from gaining limited attention from Asia specialists in the academic community [that'd be us], these conferences did not usually amount to much more than UN-esque talk shops. I do not need to say that times have changed; the 7th ASEM Summit in Beijing is proving to be a rather livelier affair. Having accumulated an almost unfathomable $1.9 trillion in reserves, China's margin of safety is no small beer. Also, it has caused Europeans and Asians to take notice.

Let us begin with the Europeans asking China to participate more fully in the upcoming US-sponsored meeting. Are the Europeans finally letting an LDC have full say in global economic governance? From Reuters:

The European Union wants China, with the world's biggest stash of currency reserves, to play a full part at a crisis summit that U.S. President George W. Bush is convening next month to help shape global financial reforms and tackle the economic imbalances at the root of the crisis.

French President Nicolas Sarkozy said he hoped the ASEM summit would agree on a joint position for the November 15 talks. "I have wanted this meeting," Sarkozy said referring to the Bush summit, "and I hope that we can come up with a common set of initiatives so that the same causes don't produce the same effects," Sarkozy told Hu ahead of the formal ASEM sessions.

German Chancellor Angela Merkel said China was receptive to taking part an international drive for new rules to avert a repeat of the present crisis. "There's support over here for the idea that we need order in financial markets and a financial market constitution with international character," Merkel, who had earlier met Hu, said. "I think China will make its contribution to the stabilization of the world economy," she told reporters.

More interestingly, other Asian economies are soliciting more guarantees of support from China. Although the region already has a system of currency swaps in place worth some $80 billion (we should call it Chiang Mai Initiative Plus or CMI+ to acknowledge the switch from bilateral swaps previously in place), many are now doubting if that amount will suffice given the magnitude of today's problems. The CFR's Brad Setser has highlighted how instrumental swap lines have been in keeping industrialized countries afloat. Further turmoil may mean that Asian countries will lean on them as well:

On Friday morning, the ASEAN group of Southeast Asian states agreed at talks with Japan, China and South Korea to upgrade a long-established $80 billion web of currency swap lines among central banks in the region. The purpose is to allow a country facing a foreign exchange crisis to rapidly call up financial firepower by swapping its currency for those of its neighbors, or for dollars.

The aim would be to sell the borrowed money in the foreign exchange market to stem pressure on the currency under attack and so avert a repeat of the market meltdown that plunged several Asian countries into deep recession a decade ago.

Asia has fared better during the latest bout of turbulence on global markets. ASEAN's leaders expressed confidence that the group's financial sector remained "solid and sound."

"Nevertheless, precautionary actions are needed to send a clear and unequivocal signal that ASEAN is resolute and better prepared than 10 years ago when the financial crisis hit the region in 1997," ASEAN said after its own pre-summit talks. ASEAN groups Cambodia, Malaysia, Indonesia, Singapore, Vietnam, Philippines, Laos, Thailand, Myanmar and Brunei.

Governments worry that banks throughout the region will come under pressure as global economic conditions worsen. South Korea, even though it has $240 billion in currency reserves, had to unveil a $130 billion bailout package for its banks on Sunday.

"Leaders at the meeting shared the need of stepping up regional cooperation to cope with the global financial crisis and to coordinate policies," South Korea's presidential office said after the talks with ASEAN that endorsed beefing up the swaps scheme.

For what it's worth, don't forget that China was reluctant to make a major financial commitment to Pakistan. Still, countries which were badly affected by the 1997 Asian financial crisis--Thailand and the Philippines--are unsurprisingly pushing hard for an expanded agreement at ASEM:

Thailand said on Wednesday it would propose that Asian countries expand a short-term liquidity support scheme to at least $150 billion at a meeting in Beijing this week. In May, East Asian finance ministers agreed to create $80 billion in currency swaps to replace existing arrangements of mainly bilateral swaps, called the Chiang Mai Initiative.

Olarn Chaipravat, a Thai deputy prime minister in charge of economics, told Reuters Thailand would propose "an implementation of the proposed multilateralisation and expansion of the short-term liquidity support scheme, or the Chiang Mai Initiative, to at least 150 billion U.S. dollar equivalents". He would also propose "the pooling of sovereign wealth funds to invest in long-term Asian equities and bonds ... to finance infrastructure projects across Asia up to 200 billion U.S. dollar equivalents".

Olarn said in an interview he would propose a pooling of reserves around the region to facilitate trade, investment and tourism during an expected recession in the West. "Last, and the most important, I would propose that Asian countries put up initially 10 percent of our combined foreign reserves, an initial down payment of 350 billion U.S. dollar equivalents," he said. It would be held in what he called Asian convertible currencies, he said, adding: "This will be the beginning of the Asian financial community." Southeast Asian leaders meet in Beijing this week to discuss measures to deal with the global financial crisis.

The Association of South East Asia Nations (ASEAN), along with China, Japan and South Korea, will have an opportunity to discuss ideas from various members as they gather for a two-day Asia-Europe summit opening on Friday. Last week, Philippine President Gloria Macapagal Arroyo announced a plan to set up a regional fund to help countries cope with the credit crisis. She said the World Bank had committed to initially provide $10 billion to a fund to buy toxic debt and recapitalise banks in the region hit by the crisis. The World Bank said it had not made such a commitment and other countries seemed taken aback.