Indonesian Position toward Sino-Japanese Competition in East Asian Financial Regionalism

Transcription

1 Working Paper: Please do not quote Indonesian Position toward Sino-Japanese Competition in East Asian Financial Regionalism Eko NM Saputro 1 Abstract. As major player in ASEAN, Indonesia traditionally holds important role in dealing with Plus Three members, particularly Japan and China. In bilateral context, Indonesia also has maintained tight economic relations with Japan, and has been developing strong economic connection with new Asian house power, China. Considering long lasting competition between Japan and China, Indonesian position in the mid of the two major powers is elaborated in this paper. It includes the description of Indonesian political and economic relations with both countries and officials perception toward the relations. Taking ASEAN+3 financial cooperation as a case, the initial findings show that although Indonesia traditionally has close relations with Japan, the country has been trying to be neutral in order to maintain relations to both Asian major powers and maximising its economic interests in the regional arrangement. Keywords: Sino-Japanese rivalry, financial cooperation, Indonesian political economy. Introduction East Asia is a diverse region in terms of politics and economy. The region is abundant with various values, political systems, and levels of economic development. The domestic political configuration in East Asia countries is ranging from authoritarian to open democracy with various internal political conflicts. In terms of economy, the East Asia also has various economic conditions ranging from China and Japan large economies to a number of Southeast Asian small economies (Beeson 2003, p. 259). In security issue, several East Asia countries have also a dispute or tension with their neighbours. Territorial disputes and overlapping claims of sovereignty remain unresolved under the relatively peaceful political surface (Alatas 2001). The different types of political infrastructure as well as different levels of economic development generate a challenge in such initiatives. The study of East Asian regionalism almost always brings the issues of ASEAN (Association of South East Asian Nations), APEC (Asia-Pacific Economic Cooperation) and the ASEAN+3 Forum into discussion. The activities of these three regional institutions have been contributing to the dynamic of regional economic regionalism. However, the development of ASEAN+3 forum currently has been catching up many eyes due to its concrete initiatives in the mid of global financial uncertainty. 1 PhD Candidate at School of Humanities and Social Sciences, Deakin University, Australia, and Visiting Scholar at the Policy Research Institute, Ministry of Finance, Japan 1

2 Considering its progress, this paper will focus merely on ASEAN+3 forum particularly in its financial cooperation. In this research, the East Asia region will primarily refer to the members of ASEAN+3 forum including ten ASEAN members plus China, South Korea, and Japan. These countries basically represent North East and South East Asian nations. Indeed, there might be other countries like Taiwan as part of East Asia region, but they will not be examined since they are not related to the ASEAN+3 financial cooperation, as a case of this research. According to Katzenstein (2000), regionalism is a political structure that reflects the strategies of government, business corporation, and various non-government organisations as well as social movements. In similar perspective, Acharya (2011) defines regionalism as an effort to build a common platform that comprises new inter-governmental organizations and transnational civil society. Put simply, regionalism involves political factor as a substantial element that differs the term from regionalisation that does not require political influence. Regionalisation is understood as an advanced transnational economic linkage that is driven by market, in the opposed to state-led (Acharya 2011, p. 14). Moreover, Beeson (2007) argues that regionalism is always associated with the awareness to formulate political cooperation and coordination that sometimes conveys the historical trauma into the process. In this regard, the regionalism in East Asia certainly takes the trauma into the course that leads to the dynamic of the region in shaping its form of regionalism. Particularly in finance, the trauma of having economic turbulence during Asian financial crisis has contributed to put financial cooperation as ASEAN+3 special agenda (Pempel 2010, p. 219). Historically, the ASEAN+3 forum was formalised by releasing a joint leaders statement in East Asian Cooperation. In general, the leaders statement covered two major issues, economy and politics, along with their derivative fields. Based on the statement, several ministers of ASEAN+3 member countries started to hold their departmental process under ASEAN+3 framework (Suzuki 2004, p. 7). In later development, ASEAN+3 forum put more concern on economic issue rather than political agenda. Shin and Cho (2010) argue that East Asian countries tend to restrain themselves from domestic political issues in order to maintain economic cooperation. In some cases, even when two East Asian countries had a political dispute, their commitment toward economic cooperation was not intervened by the dispute. Meanwhile, the growing economic interdependence and the lesson learnt from financial crisis have become catalysts for the ASEAN+3 member countries to interact more closely to focus on regional economic development. In this regard, there were at least two lessons from the crisis: first, the victims of the crisis could not stabilise its economy solely; and second, the western allay, particularly United State (US), could be reliable to provide assistance. Therefore, a regional economic cooperation is necessary to tackle future crisis together with own regional capacity. It could be said that ASEAN+3 is the newest regional institutions compared to two previous institutions (ASEAN and APEC). Some scholars (Beeson 2007; Ravenhill 2006; Sheng 2009; Yue & Pangestu 2006) even argue that the dynamic in ASEAN and APEC, particularly during Asian financial crisis, has 2

3 contributed to shape the character of ASEAN+3 forum. The birth of ASEAN+3 forum was a reaction of the absence of collective action and sense of solidarity of ASEAN and APEC during financial shock. During the economic turbulence, ASEAN seemed had no enough resource to heal their members from the crisis, while APEC that consisting of major world economies was likely unwilling to provide cure for the victims of the crisis. The development of the East Asian regionalism involves political economic competition between two Asian major powers, Japan and China. The Sino-Japanese traumatic relationship is one of the political facets that influence the development of the East Asian regionalism. Especially on ASEAN+3, Acharya argues that the future development of regional integration requires the completion of Sino-Japanese competition (Acharya in Wirth 2009, p. 2). The unresolved historical issues between the two giant countries are latent frictions that can emerge anytime and inhibit the progress of regionalism in East Asia. The current situation within both Asian major powers shows potential tight competition between them. On the one hand, China has been fortune to have rapid economic growth that leads the country to be the second largest economy in the world. With high economic growth, cheap labour, and big market, China has transformed its economy into the one of major house powers in the world. The rise in economy also allows China to allocate its budget to strengthen its military forces. In 2011, China has spent more than USD 140 billion, and put it as the world second largest spender (SIPRI 2012). On the other hand, Japan as a leading nation in Asia, still has relatively low economic performance even though it remains hold traditional leadership in Asia. Unfortunately, its position as second largest economy in the world has been taken over by China. In security issue, Japan is still dependent to United States (US) capacity. Therefore, the rise of Chinese economic performance has substantially supported China to challenge the Japanese domination in East Asia region. Figure 1. The 10 largest military spenders 2 However, in some degrees, the Sino-Japanese competition can be perceived in positive perspective. The change in political dynamic between two Asian major powers has contributed to promote further tight cooperation in the region (Chey 2010, p. 466). Rather than challenge each other that potentially 2 Source: Stockholm International Peace Research Institute, Year Book,

4 hampers their domestic interests, the both major powers have been collaborating closely, especially in the area of economy. In order to maintain its growing economy, China has no choice but secure its relations with the East Asia region. For China, regional cooperation will secure not only its economy, but also power politics and competition (Breslin 2010, p. 710). Furthermore, the regional cooperation may also reduce the fear feeling of Southeast Asian countries toward Chinese threats (He, B 2004). The historical stigma of communism, that became a regional threat during and after World War II, is expected to be lessened by regional cooperation. Moreover, the Chinese soft diplomacy approach that keeps it in low profile in the eyes of its regional colleagues has gained positive response and resulted in concrete initiatives. The positive side of the Sino-Japanese competition has also been shown in the development of regional economic cooperation. The political rivalry between Beijing and Tokyo has given impetus for closer regional arrangement. Terada (2007, pp. 12-3) argues that the ASEAN-China Free Trade Agreement (ACFTA) was China s response toward the development of Japan s bilateral free trade agreement with several ASEAN member countries. On the other hand, the CAFTA also triggered Japan to establish Japan - ASEAN Comprehensive Economic Partnership Agreement. It also aims to avoid Tokyo from the isolation in cooperation with East Asia (Wirth 2009, p. 13). This competition shows that both major powers attempt to secure their regional influence while at the same time brings induces them to provide public goods for positive regional arrangement (Hidetaka 2005). In the same arena, it is no doubt that Japan has been playing greater role toward the progress of East Asian regionalism. Traditionally, Japan takes leadership in East Asia region due to its great political and economic powers. Japan also plays as a mediator between East Asian developing countries and international advanced economies as well as global institution (Grimes 2009). For many Southeast Asia countries, Japan has become their source of supports for many areas, especially investment, financial assistance and technical assistance. For instance, in 2010, ASEAN countries had received USD 8.4 billion investment inflows from Japan 3 that made Japan as the third largest provider for ASEAN after European Union (EU) and United States (US). For international financial institution, Japan is the second largest contributor to the IMF and holds the largest shareholder along with US. Particularly during Asian financial crisis, Japan became the biggest contributor with USD 19 billion for the package organised by IMF (Yu 2000, p. 297). The ability of Japan to provide financial assistance for developing countries while supporting international financial institution creates a unique position of Japan in the region. Furthermore, Japan has utilised some countries in East Asia, particularly the south part, as its industrial production base since Southeast Asia region is abundant with natural resources and cheap labour. Due to its advanced capacity to create sophisticated research and technology, Japan has been maintaining leadership in many areas of economy in Asia. Although several Southeast Asian countries have 3 ASEAN Investment Report

5 transformed their position into emerging economy and moving forward to be developed countries, the Japanese economic leadership in East Asia is still inevitable. Inouguchi (2011, p. 241) argues that Japan will remain lead the group of flying geese and cover not only East Asia but also other regions. The wide gap of economic level between Japan and Southeast Asian countries makes Japan will continually lead the Asian economy. The continuity of Japan domination is predicted to be maintained as long as the Sakura nation can sustain its position as front-liner in advanced technology. Another important country in the East Asian financial regionalism is Indonesia. With population more than 240 million and average annual GDP growth around six per cent per year, makes Indonesia as potential market with strong demand. The sound in macroeconomic indicators has turned Indonesia to create larger middle class in the near future. In 2014, it is predicted that Indonesia will have 150 million people in the middle class range (Khatri, Le & Newton 2011, p. 45). This will significantly support regional demand. In supply side, the country is also abundant with raw material and energy that are essential for production process of East Asian industries, that currently dominated by Chinese and Japanese companies. In the context of the Sino-Japanese relationship, Indonesia historically had close relationship with both major powers in Asia. The relationship includes political and economic issues that mostly occurred after World War II. The political economic development in Indonesia has shaped the way of the country toward its engagement with the Asian major powers. There was a time that Indonesia was perceived as a nation whose closer relations with China since the Soekarno regime was identified to have collaboration with Indonesian Communist Party (PKI), an ally of Chinese Communist Party. But, there was also a time when Indonesia was recognized as capitalist-backer since Soeharto regime had given too many facilities to Japanese companies. This dynamic has lived in Indonesia for many decades. Today, Indonesia has embraced democratic system that is believed has contributed to shape the new Indonesian political economic perspective toward the Asian major powers, particularly in the East Asian financial regionalism. This paper attempts to explore Indonesian position toward Sino-Japanese competition in the East Asian financial regionalism by taking ASEAN+3 financial cooperation as a case. It begins with the involvement of Japan and China in the development of East Asian regionalism particularly in the connection with Southeast Asian nations, and followed by the description of Indonesian bilateral relations with China and Japan. In addition, the various perceptions of several resource persons (mostly from financial authorities), toward Sino-Japanese competition will also be observed. The Japanese and Chinese Responses to the East Asian Regionalism The Sino-Japanese relations have been almost always bringing historical experience into account. The pain due to Sino-Japanese war is still felt by Chinese people and often utilised by Chinese government as bedrock to challenge Japanese policy. In several cases, the competition of showing greater 5

6 influence is inevitable. The following paragraph will discuss about Japan s and China s pattern in spreading their influences particularly in Southeast Asia region. Basically, Japan was not only at war with China but also attacked the whole Southeast Asia. Over the time, many Southeast Asian countries have tried not to open the soreness of the occupation. Meanwhile, Japan appeals to Southeast Asian nations by providing economic assistance for development as well as support for independency. These pledges are claimed as the remedies for the pain of Southeast Asian countries. On the contrary, China and South Korea still maintain latent pain that can explode anytime, especially when there is a political tension. Japan has started to spread its influence in Southeast Asia since 1960s-1970s when the economic fortune was gained by the nation. At that time, Japan had inaugurated its influence toward Southeast Asia region through tight economic diplomacy with Southeast Asian nations. In this regard, Japan also shifted its perspective toward Southeast Asian from market destination to production base (Ryokichi 2003, p. 127). The lack of raw materials from domestic resources combined with strong pressure of environment awareness had pushed Japanese industries to relocate their business outside Japan. The economic linkage between Japan and ASEAN member countries was developed in which ASEAN countries provided cheap labour, raw materials, as well as production base, whereas Japan offered transfer of technology. The cooperation was merely in bilateral base in which Japan cooperated with each ASEAN member country separately. The spark of Japanese intention to collaborate with ASEAN members as a bloc was just emerged in the aftermath of Asian financial crisis. The participation of Japan in industrialisation of Southeast Asian countries during 1970s was merely based on economic consideration. It did not involve direct political initiative even though Japan had a strong United States (US) political support. Therefore, Japan never involved evidently in changing regime of Southeast Asian countries. Japan s focus was merely on economic purposes. However, some nationalism activists in ASEAN countries viewed that Japan s economic activities in the region would potentially exploit national resources and create another form of occupation. In 1974, for instance, the official visit of Prime Minister Kakuei Tanaka in Indonesia was protested by students who promoted anti-capitalism issue (Adam 2010). The chaos occurred during the visit involving the burning of Japanese products such as motorbikes and cars. This situation made a shame for Soeharto regime that expected more investment from Japan to develop the nation. As a result, political actions associated with anti-capitalism were banned by the Indonesian government in order to avoid further damage toward investment and industrialisation. The same situation happened in Thailand and Malaysia by boycotting Japanese products (Akrasanee & Prasert 2003). At this point, even though Japan had tried to avoid political issues in its regional economic activities, political implication toward the domination of Japan in Southeast Asian countries was unavoidable. In contrary, China began its influence in Southeast Asia through political action. On 1960s, the Chinese government supported communism movement throughout Southeast Asia region as a part of internationalisation of communism ideology. The spread of communism has been challenged by anti- 6

7 communist movements backed up by Western, particularly the US. Several domestic conflicts happened in Southeast Asian countries due to the battle between the proponent and opponent of communism. In Indonesia for instance, the battle had resulted in the collapse of Soekarno regime that was allegedly associated with communist movement in Indonesia. The momentum also induced the establishment of ASEAN as a medium to strengthen security ties against communism. Put simply, China s strategy to regionalise its influence had failed and even gained suspicious feeling toward China, especially during Cold War. At the end of 1970s, China tried to restore its regional relations by keeping its diplomatic approach in low profile level. The Chinese leaders understood that an aggressive approach would not gain positive effect for China. Premier Zhu Rongji even argued that China should give more - take less, and give first - take later, in maintaining regional cooperation (Wang, YZ 2011, p. 203). The strategy is likely success to build the trust among other countries in the region and gained positive responses. For example, following the proposal of Premier Zhu Rongji in November 2000 to create ACFTA, both parties finally have agreed to operationalize the agreement by 2010 (Wang, JY 2011, p. 614). The ACFTA is claimed as the world s largest FTA by population due to Chinese and Indonesian big population. Beyond economic advantage, China needs ASEAN s support for several issues such as One China Policy and human right issue (Wang, YZ 2011, p. 206). On that issue, China seems to gain political support from ASEAN member countries. The involvement of Japan and China the East Asian regionalism predominantly operated in trade and investment. This case is quite parallel with the situation around the world in which trade becomes the central issue at the period of 1970s to 1990s. The issue for regionalism was shifted to financialmonetary agenda when the financial crisis hampered many East Asian countries such as Indonesia, Thailand, Malaysia, and South Korea. The crisis triggered East Asian countries to more focus on financial issue especially liquidity provision to deal with crisis. The engagement of both Asian major powers in the development of East Asian regionalism is very obvious especially in the aftermath of Asian financial crisis. Previously, Japan was not so keen in the concept of East Asia regionalism since the country was more concerned on Asia Pacific model of integration. Inouguchi (2011, p. 236) argues that there are two mainstreams in Japan in regard to economic integration: first is East Asia line and second is Asia Pacific line. The second line was quite dominant, and with the Australian support, it had successfully established APEC in The attention toward East Asian regionalism was not a part of Japanese strong policy until ASEAN leaders invited Japan, South Korea, and China to join ASEAN summit meeting in the mid of Asian financial crisis, Considering its close relations with US, Japan seemed to be less enthusiastic toward the proposed concept of East Asian regionalism. In the contrary, China sent positive feedback in response to the initiative. At this stage, Japan began to worry about the Chinese intention to tighten its relations with ASEAN that could potentially take a lead the whole East Asia region (Amako 2007, p. 14). The absence of US opposition toward Japan s intention to join the concept of ASEAN+3 contributed to further deepening participation of the two Asian giant countries in the progress of East Asian 7

8 regionalism. Hence, the competition for leadership and influence in East Asian cooperation is continuing (Zhao 2011, p. 161). Sino-Japanese Competition in the ASEAN+3 Financial Cooperation The roles of Asian major powers, Japan and China, are indispensable in the inception of ASEAN+3 forum. The commitment of Japan and China to provide financial packages to the region, during Asian Financial Crisis, sent strong signal for ASEAN member countries, that the major powers were keen to collaborate in building up a new regional architecture. It also implied that both Japan and China recognised that the dynamic in Southeast Asia region would affect their economic interests since the region was important as market and production chain. In later development of the ASEAN+3, although various issues were discussed in the ASEAN+3 process, the financial-monetary cooperation seemed to be exclusively put more focus than the other issues due to the unforgettable trauma of Asian crisis (Pempel 2010, p. 219). The ASEAN+3 countries recognize that they need to find their own way to deal with economic crisis since US could not be reliable anymore for such economic crisis (Soesastro 2003). Therefore, the willingness of Japan and China to rescue Asian economy during 1997 crisis was essential phase toward the development of financial cooperation in East Asia region. In 1999, after dealing with the crisis for a moment, ASEAN finance ministers realised that that there should be better efforts toward the crisis. Their mandate to International Monetary Fund (IMF) to lead the crisis mitigation process was perceived less successful. Therefore, in their meeting on April 1999, ASEAN finance ministers responded by releasing two importance points (ASEAN 1999). The first was the intention of ASEAN member countries to take proactive action in order to ensure their interests and priorities in coping with the financial crisis. This point shows the exertion of ASEAN to shift their role from the adherent of the international institution/imf into more active player. The second was the recognisance to reform the international financial architecture including the review of international financial institutions (IFIs). At this point, the ASEAN finance ministers sent a message to the global community that there was something wrong with the IMF, so that such reforms should be applied. ASEAN realized that they needed to build an alternative arrangement for dealing with crisis that put them in the centre of the arrangement. Therefore, the new development of ASEAN financial cooperation was started by embracing Asian advanced countries (Japan, South Korea, and China), that eventually led to create ASEAN+3 financial cooperation. This momentum has expressed the transformation of ASEAN financial cooperation in dealing with Asian crisis in particular and international financial architecture in general. The seed of ASEAN+3 forum came up during the Second Informal ASEAN summit in Kuala Lumpur, December The presence of three major countries in East Asia (Japan, Korea, and China) in the meeting resulted in mutual recognition toward closer cooperation among ASEAN and Plus Three countries in the 21 st century. In 1998, the ASEAN and Plus Three leaders gathered again in Hanoi to 8

9 share some views on strengthening cooperation. At this stage, the leaders discussed many issues including financial crisis, maintaining peace, as well as regional stability and development. They also came to the agreement to have regular meeting as a medium to enhance dialogue process. Furthermore, in order to develop ideas and formulate agendas for ASEAN+3 forum, the East Asian Vision Group (EAVG) was created in October The creation of the group became evidence that ASEAN+3 forum sought a clear guidance and path to achieve their vision. Particularly in financial cooperation, the leaders agreed to collaborate in risk management, corporate governance, monitoring capital flows, strengthening banking and financial system, reforming international financial architecture, and enhancing self-help mechanism (ASEAN Plus Three 1999). This is the first time that the terms of self-help mechanism was introduced to emphasize the type of ASEAN+3 cooperation that more relied on regional-owned strength and resources rather than international ones. This moment also pronounced the East Asian dissatisfaction toward international financial architecture and showed their demand to reform the regional and global financial governance. The first attempt to realise the ASEAN+3 financial cooperation was in March 1999, when the deputy finance ministers and deputy central bank governors of ASEAN+3 member countries met in Ha Noi. In relatively short statement, they recognized the need to have closer cooperation to prevent future crisis, and include the emerging countries in shaping new international financial architecture. The latter point is very critical in which ASEAN+3 financial cooperation acknowledges that the voice of emerging economies in the process of reforming financial architecture is necessary; something that never happened before due to the domination of major economies in dictating their interests. There are several financial initiatives under ASEAN+3 framework that have been explored and implemented. Generally, the ASEAN+3 financial cooperation has various initiatives ranging from surveillance to research activities. In this paper, three existing initiatives related to liquidity support arrangement, credit enhancement and regional economic surveillance are discussed since they involved the Sino-Japanese competition in their processes. Liquidity Support Arrangements The ASEAN+3 liquidity support arrangement started in 2000 when an expanded ASEAN Swap Arrangement (ASA) was merged with a network of Bilateral Swap Arrangements (BSAs) under the Chiang Mai Initiative (CMI). Both ASA and BSAs were basically aimed at providing liquidity support for the ASEAN+3 member countries that face short-term liquidity problem. Different from ASA that allowed ASEAN members to draw maximum up to twice of their commitments, the basic drawing principle of BSAs has just allowed the requesting countries to draw up to 10 per cent of maximum drawing amount without IMF linkage programs (Rana 2002, p. 9). If such member country requested to draw the remaining fund, they should be under IMF program arrangement. In 2000, ASA was expanded by ASEAN member countries (including the new ASEAN members) with total size of USD 1 billion. Then, it was increased to USD 2 billion in April 2005 reflecting stronger ASEAN members commitment 9

10 toward regional financial cooperation. Meanwhile the BSAs were operationally signed starting from 2001 involving all Plus Three countries and three ASEAN countries (Thailand, Philippines, Malaysia). Throughout the years, the number of BSA agreement as well as the amount of the network increased. In 2002 the total amounts of BSAs was around USD 20 billion. Then, it increased to USD 35.5 billion covering 16 BSAs in 2003 (Wang 2004); and continually increased up to USD 36.5 in 2004 (Sohn 2005). Until April 2009, the amount of BSAs reached USD 90 billion. In addition, the ASA and BSAs operated based on various bilateral contracts that included various articles of agreement, something that was relatively inefficient in terms of governance. The operational of CMI had been reviewed in order to further develop better regional liquidity support arrangement. The reviews included several key elements of CMI such as size, pooling structure, surveillance, decision-making process, IMF linkage, and type of the contract agreement. The period of was critical toward the establishment of Chiang Mai Initiative Multilateralisation (CMIM) as the new form of regional liquidity support arrangement. In 2006 for instance, a new task force was set up to further study various options to improve the arrangement (APT 2006). One year later, the significance change toward the regional arrangement has been produced in Kyoto in which all ASEAN+3 finance ministers agreed to govern the self-managed reserve pooling based on single contractual agreement (APT 2007). This new governance implied that all parties in the CMI would be bound in a single agreement instead of various agreements as used in BSAs. Put simply, CMI was shifted from bilateral arrangement to multilateral one. The ASEAN+3 finance ministers also emphasized that the CMIM will operate as a supplement of existing international financial arrangement which is basically re-emphasizing the role of IMF as the lender of last resort. Therefore, CMIM was still equipped with bridging conditionality, namely IMF-linked portion that push ASEAN+3 member countries to have IMF arrangement if they seek to access larger financial support of CMIM. In contrary, an ASEAN+3 member country could directly access the IMF de-linked portion of CMIM without any arrangement under IMF. Following Kyoto meeting, some progresses have been made. In terms of pooling amount, the ASEAN+3 member countries agreed that the CMIM would be at least USD 80 billion with sharing contribution of 20:80 for ASEAN and Plus Three blocks respectively (APT 2008). Several important elements such as borrowing access and activation mechanism were also agreed. Especially the size of CMIM, its amount has been continually increased to USD 120 in midst of ASEAN+3 finance ministers special meeting in Phuket, February 2009, in order to respond global financial crisis that hampered US economy and potentially spread into East Asia region. In addition to that, the ministers also agreed to create stronger surveillance mechanism that would support CMIM operational (APT 2009a). The special meeting also produced a commitment to possibly increase the IMF de-linked portion more than 20 per cent once the independent was fully operationalized. The 2009 global financial crisis had contributed to expedite the CMIM negotiation process. Before the crisis, the negotiation processes were relatively slow although they showed concrete results. Therefore, it could be said that 2009 was studded with many agreed points of the CMIM. In their 12 th meeting in 10

11 Bali, the ASEAN+3 finance ministers agreed on all main elements of the CMIM including sharing contribution of each nation, borrowing access, surveillance mechanism and participation of Hong Kong Monetary Authority, China (APT 2009b). Following the Bali meeting, in December 28, 2009, the establishment of CMIM was simultaneously publicised by ASEAN+3 member countries, expecting greater announcement effect to build regional market confidence and stability. The announcement emphasized the commitments of 13 ASEAN+3 member countries to bring the CMIM into force (APT 2009c). The announcement relatively succeeded to mitigate the effect of the global financial crisis from hampering East Asian region, although several member countries such as Singapore and Malaysia experienced negative growth during that period. Considering different domestic regulation process, CMIM agreement has completely come into effect on March 24, It took around 90 days from the announcement to get national internal approval to adopt the agreement as a legal document for all ASEAN+3 member countries. Unfortunately, the complete agreement of CMIM has not been opened for public. Instead, the ASEAN+3 finance ministers provided public with some key points of the CMIM agreement (APT 2010). This protection that limits public access to the details of the agreement shows the lack of ASEAN+3 s transparency. As comparison, ASEAN had publicised the ASA articles of agreement as well as its amendments for the public without limitation. One of the CMIM key points is decision-making process. The CMIM consists of two levels of decisionmaking bodies namely Ministerial Level Decision-Making Body (MLDMB) and Executive Level Decision-Making Body (ELDMB). The MLDMB is authorized to give decision regarding fundamental issues, while ELDMB is working on executive issues. The members of MLDMB are 13 ASEAN+3 finance ministers. In decision making process, they deal with the size of the CMIM contribution of each party, the maximum swap amounts for drawings and renewals, terms of participation in the CMIM Agreement, terms of reinstatement for any member that propose to reinstall, or other matters that agreed as fundamental issues. Meanwhile, the executive issues that are more related to operational issues of the CMIM such as approval of drawings, approvals of renewals of drawing, waiver of any conditions, declaration of event of default, and approvals of escape, finance minister deputies and central bank deputies of ASEAN+3 member countries including Hong Kong monetary authority are working on this CMIM body. Interestingly, CMIM has introduced voting mechanism in its decision-making process. This arrangement is perceived as an advanced progress in Asian regionalism that usually put consensus as a norm in decision-making process. Adopting IMF model, CMIM distributes voting rights to its members based on their individual contribution (see table 1). The contribution was made by providing commitment letter mentioning that each country commits to provide financial support within the amount of its contribution. This arrangement implies that the fund basically still being kept in each member country s reserve till a member requests to access the financial assistance. 11

12 The introduction of voting right leads the individual contribution of CMIM becomes critical. Previously, several proposals regarding contribution method calculation have been discussed. One of the proposals was using Gross Domestic Product (GDP) as weighted of contribution. This proposal was rejected by Indonesia particularly, whose very big GDP due to large population but relatively smaller in the amount of international reserve. Then, after various simulation of contribution, the individual contribution was agreed based on capacity and potential need. Table 1: CMIM contribution, purchasing multiple and voting power 4 Financial contribution Purchasing Multiple Basic votes Votes based on contribution Total voting power Country USD (billion) (%) (no. of vote) (no. of vote) (no. of vote) (%) China (Excluding Hong Kong, China) China* Hong Kong, China 4.2 Japan Korea Plus Indonesia Thailand Malaysia Singapore Philippines Vietnam Cambodia Myanmar Brunei Lao PDR ASEAN Total The Joint Ministerial Statement of the 13 th AFMM+3 12

13 There are three important points that could be drawn from the table. Firstly, it is obvious that Plus Three nations (as a group) dominate over ASEAN bloc with per cent voting right. This figure shows the traditional role of most of ASEAN countries as recipients while Plus Three bloc is donor countries during crisis time. When voting is applicable, such executive level decision requests 2/3 majority. It means that Plus Three countries as a bloc has greater power to block any decision in CMIM than ASEAN bloc. Secondly, smaller economies, such as Lao PDR and Cambodia, are given bigger purchasing multiple. This arrangement allows the small economies to access more financial assistance than bigger economies. Compared to the ASA that simply allows all ASEAN members to access twice of their contribution, the CMIM arrangement is relatively fairer since the smaller economies have more potential to face liquidity problems. Thirdly, the equal amount of contribution between China and Japan reflects the growing Chinese economic power against Japanese leadership in the region. It is noted that the calculation for Plus Three bloc contribution in CMIM took more time compared to ASEAN bloc since Japan and China insisted to be the biggest contributor considering their economies and stock of international reserve. Being the biggest contribution of CMIM would show the leadership and influence as well as the level of economic confidence to the region and global market. At the end, Japan and China agreed to share equal contribution even though the Chinese contribution would be shared with Hong Kong. This is the win-win solution in which Japan textually becomes the biggest contributor in CMIM whereas China plus Hong Kong also have the same amount in aggregate. The position of Hong Kong in CMIM is quite unique. As a part of China s administration politically, Hong Kong has an independent authority to manage its monetary policy that separated from Chinese monetary authority. In CMIM s initial contribution, Japan and China contribute USD billion each, in which Hong Kong will share USD 4.2 billion as a part of Chinese contribution. Although China and Hong Kong have separated voting rights in CMIM, Hong Kong will unlikely cast its votes separately from China. It is important to understand that the highest decision-making process in CMIM belongs to ASEAN+3 finance ministers. As a part of China, Hong Kong does not have finance minister that may join in MLDMB. Therefore, the voting rights of Japan and China will remain equal eventually. In further development, the 15 th ASEAN+3 finance ministers and central bank governors meeting, agreed to make some adjustments related to the CMIM (APT 2012). The first is that the total size of CMIM has been doubled to USD 240 billion in order to enhance the support capacity of CMIM in dealing with crisis. However, the increase is not followed by the change in share of contribution and voting power, meaning that basically all member countries remain proportionally equal in decisionmaking process. The second amendment is to increase the IMF de-linked portion from 20 per cent to 30 per cent. This means that a requesting country will potentially get much more fund without IMF 13

14 arrangement. Interestingly, although majority of ASEAN+3 member countries including Japan supported the enhancement of IMF de-linked portion, the initial proposal was rejected by China. It is quite interesting since China usually tends to lessen the influence of international institution in the region. By rejecting the increase in the IMF de-linked portion, China implicitly keeps the IMF involvement remains largely in the regional arrangement. It is predicted that the Chinese position toward the increase of IMF de-linked portion were based on two considerations. First, China was expecting ASEAN+3 member countries to utilise IMF scheme since Chinese has increased its quota in the Fund. Currently, China is in the third rank of the IMF s top share holder. China s membership quota is more than 6 per cent which is close to Japan s 5. Second, China desires to secure its contribution in CMIM since China is likely to be donor country rather than to be recipient during crisis time. Credit Enhancement Facility Another competition between Japan and China related to the contribution in ASEAN+3 financial cooperation is showed in the Credit Guarantee and Investment Facility (CGIF). Previously named as Credit Guarantee and Investment Mechanism (CGIM), the CGIF is set as a feature to promote economic development, resilience of the financial markets, and preventing disruption to the international order. Operationally, the CGIF will provide credit enhancement for such companies that face difficulty in tapping local bond market to secure longer term-financing (CGIF 2012). At the initial step, CGIF will only focus on the credit enhancement rather than providing investment facility. The initial total fund of the CGIF is USD 700 million (APT 2010). The fund is managed by Asian Development Bank (ADB) as a trustee whilst the APT member countries become the contributors of the CGIF. Based on the members contribution (table 2), the contributions of Chinese Government and Japan Bank for International Cooperation (representing Japan) are equal. Each of them contributes USD 200 million out of USD 700 million of the CGIF total size. It is believed that the equal contribution for both Asian major powers is triggered by the specific powers given to each contributor of CGIF. Since the Meeting of Contributors is the highest decision-making body of CGIF, the amount of contribution will significantly affect the power each contributor in decision-making process. This system gives an incentive to both China and Japan to keep their powers balanced by contributing in equal amount. The competition toward contribution in CMIM and CGIF is example of the way Japan and China show their influence and leadership. One year before contributing in the CMIM, Japan and China have also engaged in the competition to assist South Korea from massive devaluation. Terada (2009) mentions that during official summit of Japan, South Korea, and China, both Asian giant economies competed to give more to South Korea. Eventually, they agreed to inject South Korea with USD 30 billion each after series of tough negotiation. 5 Updated IMF Quota Data-May

15 Table 2. CGIF Members Contributions 6 CGIF Contributors Contribution (USD) People's Republic of China 200,000,000 Japan (Japan Bank of International Cooperation) 200,000,000 Republic of Korea 100,000,000 Brunei Darussalam 5,600,000 Cambodia 100,000 Indonesia 12,600,000 Lao People's Democratic Republic 100,000 Malaysia 12,600,000 Myanmar 100,000 Philippines 12,600,000 Singapore 12,600,000 Thailand 12,600,000 Viet Nam 1,100,000 Asian Development Bank 130,000,000 Surveillance Process The ASEAN+3 surveillance process has been formed under the Economic Review and Policy Dialogue (ERPD). The dialogue was introduced for the first time during the ASEAN+3 Finance Ministers meeting, in Operationally, during ERPD session, ASEAN+3 finance minister deputies provide a report of their own economy for the other members. The ERPD report consisted on macroeconomic development, financial market development, recent macroeconomic policy management, economic outlook, and economic policy issues and challenge. Then, the process would be followed by exchange views and policy discussion. The peer review is an important feature of ERPD that is expected to create peer pressure for other members to make policy adjustment as suggested during the process. At this stage, the ASEAN+3 surveillance process relatively relies on self-assessment rather than having third party assessment to define the objectivity of the surveillance. Considering the importance of having broader perspective, in later development the representatives of Asian Development Bank (ADB) and IMF were invited to provide economic report and engaged the dialogue with the deputies. However, the ADB and the IMF had no rights to assess particular country if not requested. 6 Source: CGIF website, abmi.org/cgif/index.php/about/membercontributors 15

16 Despite its success in encouraging member countries to be more transparent in providing economic and financial information, ERPD has gained several critiques. First, the peer review process cannot automatically stimulate peer pressure since there is no binding commitment in this process. Therefore, it could be said that ERPD is not purely surveillance mechanism that may penetrate adjustment for domestic policies and practices (Jung in Nesadurai 2009). Second, there is a tendency that emerging countries cannot offer their views in deliberative way. It seems that they have analytical and perhaps psychological barriers to challenge or commend economic figures of advanced economies due to their lower capacities in surveillance process. Kawai and Houser (2007, p. 8) suggest to have more freely discussion process in order to produce good policy outcome for the region as a whole. The third, the absence of central bank governor in ERPD process is somehow exceeded by finance authorities even though the issue such as monetary and banking policy is clearly the central bank s domain. The central bank could only pose their views through their deputies level. This arrangement to some extent undermined the credibility of ERPD as a medium for experts to exchange their views. Fourth, ERPD is just a dialogue forum that does not have any unit for continuous surveillance mechanism. This condition may limit the effectiveness of ERPD for anticipating such unexpected situation. Last but not least, EPRD is criticized for its lack of independent and professional organisation that provides comprehensive analyses and assessment (Ito et al. 2005). This critique emerges since the ERPD was produced by each member country that potentially will provide partial perspective toward its national economic development. The debate on the effectiveness of ERPD had been continuing and reached its peak when there was a demand to create an independent surveillance unit for the operation of CMIM. At the ASEAN+3 deputy finance ministers meeting in Nha Trang, 2010, several deputies argued that ERPD was not needed anymore since the ASEAN+3 financial cooperation was about launching the new regional surveillance unit, namely ASEAN+3 Macroeconomic Research Office (AMRO). This unit was expected to take most of, if not all, ERPD process. Therefore, in order to avoid duplication, some member countries proposed to terminate the ERPD. For others, ERPD was still relevant since it provided direct exchange views and policies as part of its process that could not be found in other kinds of surveillance mechanism. Finally, the supporters of ERPD succeeded to maintain the process along with the operation of AMRO. It can be said that AMRO becomes an advanced step regarding the institutionalisation of surveillance process in ASEAN+3 financial cooperation. After a series of discussion, the ASEAN+3 finance ministers launched the operation of AMRO in 2011 serving as an independent surveillance unit that will monitor and analyse regional economies as well as to contribute in early detection risks and decisionmaking process of CMIM (APT 2011). As newly regional surveillance unit, it is suggested that AMRO would not surprisingly provide a distinct output compared to international surveillance report such as article IV consultation of IMF (Saputro 2011). The AMRO s report is expected to be a supplement to the IMF s global surveillance report rather than as competitor. Located in Singapore, AMRO was heading for the first time by Chinese official who defeated Japanese candidate. In this regard, the selection process of AMRO director was basically showing another Sino- 16

17 Japanese competition in the ASEAN+3 financial cooperation. At that occasion, the Japanese and Chinese candidates had competed and received relatively equal supports from the other ASEAN+3 member countries. However, the Chinese delegates strongly objected the Japanese candidate and proposed to postpone the selection process till 2011 ASEAN+3 finance ministers meeting (Rathus 2010). This situation was believed as an extension of territorial dispute between China and Japan on Senkaku/Diaoyutai island that occurred in the period of selection process of AMRO director. Finally, the meeting decided to split the tenure of AMRO director became two terms 7. The first term of one year would go to Chinese candidate, and the second term of two years administration belonged to Japanese candidate. This arrangement eventually could be accepted by both parties although it broke the proposed three years tenure as mentioned in the vacancy advertisement of AMRO director 8. The pattern of Sino-Japanese competition in economic relations unlikely follows the political rivalry between the two giant countries. The political tension that sometimes emerges due to territorial or human right issues relatively does not largely disturb the progress of economic cooperation. Honghua (2010, p. 73) argues that economic interdependence and political distrust coexist in Sino-Japanese relations. Territorial issue, particularly in 2010, has contributed to increase Japanese unfavourable view toward China. The 2011 joint opinion survey, conducted by Genron NPO and China Daily, showed that 78.3 per cent of Japanese respondents have negative views toward China. In this regard, the main issue quoted by majority of the respondents is the dispute between the two countries on Senkaku/Diaoyutai island (Genron NPO 2011). At the same survey, Chinese positive perceptions toward Japan dropped into 28.6 per cent, decreasing about 9.7 per cent from previous year (2010). However, in the same period, bilateral trade transaction between the two countries showed positive trend in which Japan s total trade with China rose 3.9 per cent due to two reasons: (i) an increase in Japanese demand to import finished goods and parts from China, and (ii) the steady economic growth of China (JETRO 2012). In 2010, Japan-China (excluding Hong Kong) total trade amounted at USD billion, exceeding the volume of Japan-US trade that was recorded USD billion 9. This achievement put China as the largest trading partner for Japan. Meanwhile, based on Chinese statistics, Japan becomes its third largest trading partner after European Union and US with total trade amounting at USD billion 10. Furthermore, China also receives large amount of Japanese Foreign Direct Investment (FDI). In 2010, the total amount of Japanese FDI to China was USD billion, that not only contributed to support Japan s economic recovery and growth, but also fuelled the Chinese economic construction (Jifeng 2010). This development suggests that both countries prioritises economy on top other issues, including political tension. In similar trend, the Sino-Japanese competition in the ASEAN+3 financial cooperation has usually been ended in compromised decision. This situation might happen due to close bilateral relations in financial sector that affect their positions in regional level. In many cases, bilateral relation co-exists with 7 Press release Appointment of the AMRO Director, ASEAN+3 Finance and Central Bank Deputies Meeting, the 6 th of April, 2011, Bali. 8 See 9 Data from Ministry of Foreign Affairs, Japan, Ibid. 17