If decoupling is set to be the financial trend to watch out for in 2010, central banks in Asia had better start mobilizing. More capital in search of higher yields is quickly arriving at these shores.

One fear remains that, come another Lehman, this capital can leave these shores quicker, triggering a liquidity crunch that forces central banks to respond on a war footing—as during the 1997-98 Asian financial crisis. This week, Asia received a fresh round of ammunition to fight such wars. Now, it needs to figure out what kind of ammunition can help manage the peace.

Illustration: Jayachandran / Mint

This ammunition comes in the form of the Chiang Mai initiative, which has evolved from a series of bilateral arrangements into a multilateral scheme. In the wake of the Asian crisis, the Association of Southeast Asian Nations (Asean), with Japan, South Korea and China (Asean+3), created a network of bilateral currency swaps to help tide over short-term liquidity problems. For instance, Indonesia could exchange rupiah for more convertible yen, reversing this transaction later—each country could tap more than one source. In December 2008, this network amounted to $84 billion in aid.

Now Asean+3 have not just expanded funding to $120 billion, but also created a multilateral pool any member can tap: Coordination is easier now than would have been with arduous individual agreements. This moves Asia one step closer to becoming a more integrated financial bloc, one that need not rely on the West. Countries such as Malaysia sorely remember the unreasonable strings that came attached with Western aid during the Asian crisis.

All of this helps battle falling asset prices or currencies the next time an investment bank collapses in the West—certainly a relief. Still, as the world has learnt since last year, central banks can sometimes come up with unconventional tools to fight wars. Managing the peace, once panic subsides, is trickier.

Which brings us to the other fear central banks across Asia share: Capital inflows force currencies to appreciate, rendering exports more expensive and, hence, uncompetitive. This is already a problem in and of itself, one compounded by the dragon -sized export engine in the neighbourhood that just refuses to let its currency appreciate.

Every time central bankers in Mumbai or Jakarta are hesitant to let their currencies appreciate even a bit, they are partly concerned about losing out to ever cheap Chinese exports. And every time a Chinese leader insists on the same exchange rate policy—as Premier Wen Jiabao did last weekend—it becomes a little more urgent for a peacetime Chiang Mai to coordinate such matters. Let’s hope this week’s multilateralization is a step closer to that.

What kind of financial coordination will Asia need in 2010? Tell us at views@livemint.com