CURRENCY SWAP PLAN SHOWS RIVALRY, COOPERATION

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 000760

SIPDIS

TREASURY FOR RKAPROTH AND RDOHNER
STATE FOR EAP/CM FLATT, THOMAS
STATE FOR EEB/OMA
STATE FOR E - YON
STATE FOR D - PARK

E.O. 12958: DECL: 03/23/2019
TAGS: ECON EFIN ETRD CH
SUBJECT: CURRENCY SWAP PLAN SHOWS RIVALRY, COOPERATION
BETWEEN CHINA, JAPAN, KOREA

REF: A. 2008 BEIJING 4121

B. 2008 SINGAPORE 947

C. 2008 SINGAPORE 143

Classified By: Economic Minister Counsellor Robert S. Luke. Reasons 1.4
(b) and (d).

SUMMARY
--------------


1. (C) Japanese and Korean EMBASSY officials in Beijing
agreed that ASEAN 3 currency swaps agreement remains more
show than substance, despite the February 22 announcement by
ASEAN 3 (China, Korea, Japan) Finance Ministers that the
Multilateral Chiang Mai Initiative (CMIM) fund will be
increased from USD80 billion to USD120 billion. Key
questions about the operation of the swap agreements remain
unanswered. China and Japan appear to be vying for
leadership and influence while Korea reports that it often
mediates between the two. According to a Beijing-based
Japanese diplomat, Japan objects to China,s push to include
Hong Kong as a separate member in the arrangement, assessing
that inclusion is designed to strengthen China,s hand in the
group. This diplomat also report that several participants
are seeking to be selected as the host of the swap
agreement,s future surveillance office in order to build
expertise and to position themselves for a key role in any
future regional finance initiatives. End Summary.

Background on Swap Agreement
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2. (SBU) On February 22, Finance Ministers from the ASEAN 3
countries -- which includes members of the Association of
Southeast Asian Nations, plus China, Japan, and Korea --
announced that they would increase the value of currency swap
agreements designed to mitigate short-term balance of
payments issues to US$120 billion from the previously
announced US$80 billion. In a March 6 meeting with Econoffs,
Japanese EMBASSY Financial and Economic Affairs Counselor
Satoru Shibata said funding issues had largely been agreed
upon. China, Japan and Korea would provide 80 percent of the
funds, or US$96 billion, and ASEAN nations would contribute
the remaining 20 percent. Of the $96 billion, he said Japan
would fund approximately 60 percent, or US$58 billion, while
China and Korea would split the remaining 40 percent, or
US$19 billion each.

Little Progress to Make the Agreement a Reality
-------------- --


3. (C) Apart from allocating the contributions, Shibata said,
little progress has been to operationalize the agreement.
Korean EMBASSY Finance and Economic Minister-Counselor (M/C)
Yoo Kwangyeol offered a similar view in a March 13 meeting
with the Embassy,s Financial M/C and Econoff. Yoo said that
the details of the ASEAN 3 agreement have not been worked out
and will be complicated by China,s cumbersome capital
controls. He said actively using the money will be
complicated and take time, and that Chinese, Korean, and
Japanese financial experts were currently examining the
issues. Yoo added that Japan and China had been jockeying to
make the biggest contribution to the fund.

Swaps Designed to Facilitate Trade and Reassure Markets
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3. (C) On the separate RMB/Won swap agreement between the
Peoples Bank of China and the Bank of Korea, which is outside
the framework of the CMIM, Korean M/C Yoo added that from
Korea,s vantage point, these bilateral swaps are not
designed to support banks, but to facilitate RMB-denominated
trade and reassure markets. He added that Korean banks have
a limited presence in China and keep most of their assets and
liabilities in U.S. dollars, not "renminbi." He noted that,
after Chinese banks pulled RMB credit lines in October and
November 2008 following Lehman Brothers, collapse, Korean
banks in China had regained access to the interbank RMB
market and that China,s banking system had excess RMB

BEIJING 00000760 002 OF 002


liquidity and was loaning some of the excess funds to Korean
banks in China.

Disagreement Over Hong Kong, Surveillance Unit Location
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4. (C) Japanese Counselor Shibata highlighted Japan,s
disagreement with China over Hong Kong inclusion as a
separate economy in the CMIM. He said Japan and other ASEAN
nations are opposed and cannot understand why China is taking
a hard-line stance on the issue. Hong Kong is not a member
of the International Monetary Fund (IMF),which is "deeply
linked" to the CMIM. Shibata believes China is seeking to
gain more influence in the CMIM process by including Hong
Kong. Korean M/C Yoo said Korea favors adding any economies
that play a key role in Asia,s financial system, including
Hong Kong.


5. (C) Shibata added that another issue dividing the parties
is the location of the swap agreement,s surveillance office.
He said Korea, Japan, and China are all seeking to have the
surveillance unit located in their countries. In addition,
he added, there remain unresolved questions about how to
staff the unit and how the unit would interact with member
countries. Korean M/C Yoo disagreed, saying Korea did not
see the surveillance unit,s location as a key issue because
there is no timetable to establish the office.


6. (C) Perhaps because of the numerous issues outstanding,
Japanese Counselor Shibata was non-committal regarding the
likelihood of reaching an agreement on the CMIM by the next
ASEAN 3 meeting in Bali on May 10, 2009, as planned.

COMMENT
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7. (C) While not wanting to be seen as undermining Asian
financial integration, China,s support for the CMIM appears
to remain lukewarm, as it sees this as a Japanese-led
initiative. Spurred by the establishment of bilateral
currency swaps between the Federal Reserve and Korea and
Singapore, China has put much more emphasis on establishing
its own bilateral swaps outside of the CMIM framework with
Hong Kong, Korea, Malaysia, and Belarus. These bilateral
swaps are almost equal the size of the CMIM swaps, and unlike
the CMIM swaps, have actually been used (with Hong Kong).
PBOC officials have told us previously that China principally
values the CMIM as the basis for a potential Asian Monetary
Fund alternative to the IMF in the event China is unable to
secure a satisfactory reallocation of voting shares within
the IMF.
PICCUTA