The Asian leaders meeting in Thailand this weekend to discuss economic strategy announced a $120 billion foreign currency reserve pool to help stabilize economies in South East Asia –more than 50% larger than the fund initially proposed last year. The Chiang Mai Initiative, as it is known, will allow the Association of Southeast Asian Nations (ASEAN) to work in consort with China, Japan and South Korea in a multinational bucket brigade that can provide liquidity rapidly when needed. The meeting, held on the heels of Secretary of State Clinton’s visit to Asia, sent a clear message that China has ascended to the economic leadership role in the region.

During her visit Secretary Clinton downplayed human rights issues as she sought assurance from Asian leaders that they will continue to finance the US deficit, a sharp reversal from the negotiating position of strength her husband’s lieutenants held during the 1997 crisis. Then, the only option for the floundering Tigers were IMF bailouts which left deep political resentments that still linger in Asia today.

The massive foreign currency reserves that China, Japan and South Korea built after 1997 are now allowing them to help their smaller neighbors as well as themselves. Regionalism has been a theme we have hit on consistently over the past year and, with this accord, Chinese and Japanese leaders appear to be moving towards building a strong cooperative block with the major South East Asian nations. Indeed, the ASEAN economies are in dire need of help from outside –Thailand announced Q4 GDP of -4.3% overnight.

Clearly, the odd man out in all of these changing policy currents is India; the ASEAN constituents (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) are hitching their Wagons to the Chinese Ox.

We sold our long China exposure (CAF) this morning but will buy it back on a down day, meanwhile we remain short India (IFN), Hong Kong (EWH) and, as of today, the weakest hand of the North Asian big three: South Korea (EWY).

Our Asian thesis remains unchanged, we will seek to be long liquidity and internal demand and short debt and export dependence in the region.

Andrew Barber

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