Asian giants join forces to fight currency attacks

ISTANBUL, Wednesday (Reuters) Japan, China and South Korea joined forces on Tuesday to bolster Asia's defences against attacks on its currencies, setting aside political tensions that had threatened to derail regional economic cooperation.

Finance ministers of Asia's largest economies agreed to closer cooperation on the Chiang Mai Initiative (CMI) - a regional foreign exchange swap pact to combat speculative runs on currencies like those that swept the region in 1997/98.

That sets the stage for their meeting on Wednesday with the Association of South East Asian Nations (ASEAN) which a senior Indonesian central banker said was likely to approve plans to double the size of the swap arrangement to over $70 billion.

"We are proposing to double the size. Right now the total fund is $35.9 billion," Hartadi Sarwono, deputy Indonesian central bank governor, told Reuters.

The success of the plan depends almost entirely on the economic might of China, Japan and South Korea, among the world's biggest holders of foreign exchange reserves.

South Korean Finance Minister Han Duck-soo, who hosted the meeting of three Asian economic powerhouses, confirmed that there were plans to increase the size and scope of the swap pact. The runup to the meeting had been overshadowed by speculation about China's plans to reform its yuan currency and diplomatic disputes.

Relations between Japan and China plummeted to their lowest level in three decades in recent weeks over a series of disputes, including Tokyo's treatment of wartime history, which is also a bone of contention in ties with Seoul.

But Japanese Finance Minister Sadakazu Tanigaki said the political rivals would pursue economic cooperation that is crucial to stability in the world's fastest growing region.

"Whatever happens, we need to promote financial cooperation even if there are issues," he said. ADB officials said the tensions would not affect their role as guarantors of regional financial stability under the five-year-old Chiang Mai Initiative.

South Korea's Han said finance ministers of the ASEAN+3 wanted to revamp the process of throwing financial lifelines to countries in distress.

"We want a collective decision-making process...more transparency," he said. Some Asian governments want to turn the web of swaps into a fledgling Asian monetary fund so the region is not dependent on the Western-dominated International Monetary Fund in times of crisis, as was the case in 1997-98.

Asia's massive $2.5 trillion in foreign exchange reserves, about two-thirds of the world's total, has given the region more economic and political clout on the global stage.

But ADB officials warned that this mountain of hard currency would not always shelter economies from storms such as the Asian crisis in which capital fled the region, wiping away years of development in weeks. The ADB's chief economist said Asia had even allowed its reserves to grow too large.

"They have grown far beyond what is (the) optimal level. It's basically a reflection of a lack of imagination, a lack of innovativeness and to some extent a lack of self-confidence," Ifzal Ali told Reuters.

Finance ministers and central bankers from dozens of Asian countries are converging on Istanbul for a three-day ADB meeting which begins on Wednesday.