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Cablegate: Asean+3 Nations Making Little Progress On Currency

VZCZCXRO2283
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #4121 3090621
ZNR UUUUU ZZH
O 040621Z NOV 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0723
INFO RUEHOO/CHINA POSTS COLLECTIVE IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUEAIIA/CIA WASHINGTON DC IMMEDIATE

UNCLAS BEIJING 004121

SIPDIS

E.O. 12958: N/A
TAGS: CN ECON EFIN KR PREL JA
SUBJECT: ASEAN+3 NATIONS MAKING LITTLE PROGRESS ON CURRENCY
SWAP ARRANGEMENTS

1. (U) Summary. Despite public announcements at the ASEM
Summit of an $80 billion swap arrangement, ASEAN 3 nations
were still discussing the multilateralization of currency
swaps as part of the Chiang Mai initiative, and important
elements are still unresolved. There is still no consensus on
key elements on how to multilateralize the arrangement,
including whether members should contribute funds into a pool
or whether the multilateral arrangement would simply
coordinate bilateral loans and whether claims from a pool
would take precedence over bilateral claims. China and Japan
currently are extending bilateral currency swaps with South
Korea of about $4 billion each, but a People's Bank of China
official characterized these as primarily symbolic gestures.
The official was also surprised to hear that the US Federal
Reserve had announced it would extend currency swaps of up to
$30 billion to South Korea and several other countries,
commenting that it appeared that the Fed was now playing the
role of the central bank of the world. End Summary.

2. (U) People's Bank of China International Department Deputy
Director General Jin Zhongxia on October 30 told Finance
MinCoun and econoff that, despite public announcements at the
ASEM Summit of an $80 billion swap arrangement, ASEAN 3
nations were still discussing the multilateralization of
currency swaps as part of the Chiang Mai initiative, and
important elements are still unresolved. (Note. The Chiang
Mai initiative was created in 2000 to establish a network of
bilateral currency swap agreements among ASEAN 3 nations.
Since 2007, discussions have focused on the
"multilateralization" of bilateral currency swaps whereby
resources would be pooled rather than lent solely on a
bilateral basis. End note.) Jin noted that at the May 2008
ASEAN 3 finance ministers meeting, participants agreed that a
multilateral currency swap fund would be capped at $85
billion, with the "plus 3" contributing 80% of the funds and
the ten ASEAN countries contributing the remaining 20%.

3. (U) According to Jin, there is still no consensus on key
elements on how to multilateralize the arrangement such as:
1) setting up a surveillance body; 2) participation of the
Hong Kong monetary authority; 3) whether members should
contribute funds into a pool when needed to on-lend to
another member or whether the multilateral arrangement would
simply coordinate bilateral loans; and 4) if loans were made
from a pool, whether the pool's claim would take precedence
to bilateral claims. Jin made clear that members would only
provide funds on a contingent basis, rather than contribute
official reserves into a standing fund. Jin noted broad
consensus to continue the policy that only 20% of the funds
each member is eligible to draw could be drawn on without an
IMF program. However, he noted that under the existing Chiang
Mai Arrangement, members should now be able to draw all of
the funds from bilateral swaps if they draw on the IMF's new
Short-Term Liquidity Facility.

4. (U) When asked if ASEAN 3 members are considering
extending finance through the bilateral swaps before
agreement on a multilateralization of the Chiang Mai
Arrangement to mitigate financial stress, Jin noted that
China's and Japan's bilateral currency swaps with South Korea
are both only around $4 billion, which Jin characterized as
primarily symbolic gestures and too small to have a
meaningful impact on financial market sentiment.

5. (U) Jin was surprised when informed that the US Federal
Reserve had announced it would extend currency swaps of up to
$30 billion to South Korea and Singapore (along with Brazil
and Mexico). Jin said they represented a significant shift
away from the Fed's traditional focus on US domestic
conditions and it was now playing the role of the central
bank of the world. He said PBOC is interested in learning
more about the tenor, terms, and conditionality of the Fed's
swaps and wondered whether the Fed was now "competing" with
the IMF to provide balance of payments support.

RANDT

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