South Korea understands the current global financial turmoil, having emerged from the 1997 Asian financial crisis with huge national debt. In fall 2008, the country feared a currency crisis as U.S. bonds depreciated, drawing down South Korea's foreign exchange reserve. The reasons for these economic upheavals lie in South Korea's financial system. The South Korean economy relies highly on foreign trade, which accounts for about half of total gross domestic product. Lower international demand thus directly impacts the country's economy. South Korea's financial market has also been too open to foreign investors. In the 1970s, the country attracted foreign banks with preferential policies. By the early 1990s, South Korea had begun to internationalize its financial market. As a result, foreign financial capital and short-term capital were too prevalent in South Korea's foreign investment. In October 2008, the country's foreign exchange reserve was $242.2 billion, but its short-term debt stood at $260.4 billion. A shrinking market and capital flight caused double landslides in the stock exchange and foreign exchange markets, threatening South Korea's financial stability. It is important for China to appreciate these lessons while joining hands with its neighbor to beat the current crisis.

The Chiang Mai Initiative was designed to strengthen financial cooperation and to promote financial mutual reliance and mutual support in the region. Financial mutual reliance mainly requires member economies to support each other when any of them has liquidity problems. In the past, currency exchange agreements always involved the dollar and considered loans the only channel for unilateral exchange, so they had very limited effect. Under the initiative, countries in need of liquidity support could only get enough immediate short-term capital to meet 10 percent of their needs, with the remaining 90 percent provided by organizations like the International Monetary Fund. But these capital rescues left countries exposed to speculation and other economic risks. To protect financial stability in the region, Asian economies have to look after each other. In May 2008, finance ministers from the ASEAN+3 agreed to establish an $80-billion emergency fund for countries low on foreign-exchange reserves.

The mutual reliance mechanism also enhances regional financial monitoring and encourages financial reform. East Asia's export-oriented economic structure has financial pitfalls, because free trade opens the door to free financial systems with all their inherent opportunities and risks. When the international capital market is unstable, Asian financial systems suffer. Therefore, it is important for Asian countries to reinforce their financial systems.

The author is an associate researcher at the China Institute of International Studies