Japan proposed the idea of an AMF shortly after the outbreak of the Asian Financial Crisis in July 1997. Although it was supported by ASEAN countries, the idea was rejected at the Hong Kong IMF and World Bank meetings in September that year by Europe and the United States.
The technical objections were on the grounds of duplication or dilution of the IMF’s central role and the creation of moral hazard, as financing credit excesses would encourage more debt excesses. But the real reason was geopolitical. As long as the IMF and World Bank majority shareholders — the United States and Europe — were not involved in the AMF, and China remained sceptical, the idea would not fly.
The geopolitical landscape has changed profoundly since the Asian Financial Crisis. The Global Financial Crisis of 2007–8 — more accurately, the North Atlantic Financial Crisis — revealed that the countries of the rich West had major flaws in the management of both their economies and their financial systems.
Post-crisis, the reforms — namely using macroprudential regulation and supervision to safeguard financial stability through a system-wide perspective — appeared to solve the need for central bank bailouts in future financial crises. Increases in individual bank capital and liquidity plus caps on total leverage increased self-regulation (bail-in), which theoretically reduces the need for central bank bailouts.
On top of that, the US Federal Reserve’s liquidity swaps with allied central banks relieved foreign exchange liquidity, buying time for countries to solve their own internal bank failures. But this was not available to non-allied countries, such as India or China.
The failures of Silicon Valley Bank and Credit Suisse in March 2023 again rattled confidence in the Western-led financial system. If the post-2008 reforms were to fail, and the West could not prevent its own financial downfall without using central bank money to bail out fragile players, where should other countries put their deposits and savings?
Middle East investors who lost money in investing in Credit Suisse AT1 (additional tier one capital) bonds were reminded that in early 2021 the United States froze the foreign exchange reserves of the Central Bank of Afghanistan. In 2022, Russia became the subject of massive financial sanctions. These sanctions were unilaterally imposed — and there is no multilateral avenue to appeal them. In addition to unmonitored interest rate and credit risks, all investors are now subject to unquantifiable risks of geopolitical sanction.
The Western neoliberal system once provided a complete trading, funding and payments model under a security umbrella that gave stakeholders ‘insurance’ in the event of financial crises. If this system is weaponised so that perceived non-compliant users can be sanctioned or have their assets seized, then others must look for self-insurance mechanisms. The AMF is an effort to create a regional self-insurance scheme that seeks to mediate the risk of unilateral sanctioning for geopolitical reasons.
In the quarter century since the AMF was first proposed, Asia has grown significantly, with the rise of China, India and ASEAN, tilting the balance of power from a unipolar to a multipolar order. East and South Asia are the growth engines of the world. China alone accounted for one-third of world economic growth in 2022. ASEAN as a group will be the fourth largest economy in the world by 2030 in terms of both population and GDP.
As East and South Asian financial systems remain largely bank-dominated, with a significant number remaining state-owned, the region is evaluating whether it should rely on the US dollar as the key currency for its supply chains and external funding. Post-1997, the region has become a net lender to the United States, accounting for nearly three quarters of its net international investment position.
The weaponisation of the US dollar has made investors and policymakers alert to the risk of their deposits, assets or payment systems being seized, confiscated or frozen in the event of geopolitical disagreements with the West. ASEAN and South Asia do not want to take sides but cannot afford to slow down their economies just to please either side. If the world slows down to a 1930s-style Great Depression, the Global South will need to secure its own sources of trade, growth and funding.
In the words of Eisuke Sakakibara, who as Japan’s vice minister of finance led the campaign to promote AMF in 1997, the idea was not an attempt to create an Asian IMF. The AMRO (ASEAN+3 Macroeconomic Research Office) already fulfils much of the research and surveillance functions for the region. The Chiang Mai Initiative’s central bank swap arrangements are an improved but as yet untested safety net for the liquidity needs of member central banks. The Asian Infrastructure Investment Bank and New Development Bank are complementary to current infrastructure funding supplied by the Asian Development Bank and other multilateral lenders.
If the United States doubles down on dollar weaponisation, then AMF 2.0 or look-alikes will become countervailing steps that push for de-dollarisation. All hinges on whether the West can arrive at an understanding with the rest of the world on the legitimate boundaries of dollar or reserve currency usage. No rules-based order can survive unilateral sanctions where there is no independent court of adjudication other than raw power.
Andrew Sheng is Chairman of George Town Institute of Open and Advanced Studies, Wawasan Open University, Penang. He was a former central banker and financial regulator.