ASEAN’s Two Suitors Post-TPP

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The US commitment to multilateral institutions, like the IMF, World Bank, and the WTO is questioned in light of rhetoric from the Trump Administration.  The IMF has yet to agree on materially participating in the third assistance package for Greece, though it was a precondition of support from the German and Dutch parliaments.  Belatedly, there seems to be greater realization that Europe needs its own Fund.  

After the 1997-1998 Asian financial crisis, alternatives to the IMF and World Bank have been more actively sought.  In part, this reflects the rise of China, as embodied in the Asian Infrastructure Investment Bank.  Intra-regional trade is extensive, and many countries seek to secure funding in emergency or crisis.  The Chiang Mai multilateral currency swap agreement dates back to 2000, but have hardly been used.

Japan has proposed a new set of bilateral currency swaps to ASEAN members.  Ostensibly, the swap lines would give Japanese businesses access to their currencies, and they would get access to the yen.  However, Japan businesses do not need access to Thai baht or Malaysian ringgit.  Of course, over time if the local currencies are used more, this could change.

 For now, the real significance is that the swap lines will give access to yen and dollars. According to Japanese data, in the September 2016-March 2017 period, an estimated 46% of ASEAN trade was invoiced in yen.  This is nearly as much the as dollar’s share (48%).   Japan has offered as much as a $40 bln facility, but completed negotiations for $3 bln bilateral swap lines with Thailand and Malaysia.

China has swap lines with many countries, but for the most part, have not been used.  The reason they have not been used is that there is simply no need for them.   Japan’s swap lines are meant to undergird not just the trade relationship but the need to secure the vehicle currency.  Outside of China-HK trade (which is really intra-China trade, and is no more foreign trade that NY exports to NJ), the yuan is not used very much to settle trade.  The need to secure dollar funding stems in part from the dollar’s role as an invoice currency, and also from the extensive use of the dollar in foreign countries and companies debt issuance.

Previously, it seemed that Chinese officials misunderstood the significance of the swap lines.  Some apparently thought the swap lines could be build blocks for a new financial architecture.    This does not seem particularly likely.  Instead, the dollar swap lines and the yen swap lines are meant to reinforce the status quo.  The dollar is used even more extensively for settlement and funding.  The experience in 2008-2009 demonstrated the vulnerability of the international system and the swap lines are meant to buttress it by making dollar funding available to selected countries banks through their central bank.

Chinese swap lines remain dormant because they are not materially needed.  The yuan is a very small settlement currency.  SWIFT shows the share of yuan payments has risen from practically zero in 2010 to a peak in August 2015 of almost 2.8%.  Since then its share has trickled off to almost 1.8% at the end of Q1.   The yen’s share was 3.3%.  It most recently bottomed near 2.2% in May 2014.  On May 24, SWIFT will publish its April estimate of global payments.

The IMF’s COFER data estimated yuan-denominated reserves of  $84.5 bln at the end of last year. Several ASEAN countries have added yuan to their reserves, including Singapore and the Philippines.  In comparison, COFER estimates that about $332 bln of reserves are in yen-denominated assets.  As an aside, we note that the Swiss National Bank has 8% of its nearly CHF696 bln reserves in Japanese yen (or roughly $55 bln).

Japanese interest in regional swap lines is not simply about the underlying competition with China.  It is about ensuring that Japan’s customers have access to the yen, which serves Japanese business interest.  It may say more about the regional rivalry with the US than China.  Japan offers to provide dollars or yen if needed.

Many observers spin scenarios about China selling off its Treasury holdings to pressure the US into making policy concessions to Beijing.   The US TIC data suggests that China has sold around $200 bln of its Treasury holdings in the 12-months ending in February.  The increase in US yields over that period seem to be more a result of domestic drivers, rising inflation, Fed normalization of monetary policy, and prospects for tax reform, infrastructure spending and a larger deficit.  China’s Treasury holdings have risen by $10.5 bln since the end of November.