Tuesday, March 31, 2009

China and the IMF

I am no expert on China, but it is clear to me that China is interested in playing a larger role in international economics and finance. It is now interested to playing a larger role in the IMF, which will re-direct the institution and its policies. The Americans and Europeans better get used to the fact that the world is not going to go back to way it was and other people now want a seat at the table. Text in bold is my emphasis. From the WSJ:

China is showing more willingness to aid organizations like the International Monetary Fund, reflecting its desire for a stronger voice in global economic affairs. But as leading economies prepare for a summit, Beijing's push for clout to match its financial resources is creating friction with rich countries.

The European Union's commissioner for external relations, Benita Ferrero-Waldner, said Monday during a visit to Beijing that the G-20 summit is "not the right moment" to negotiate IMF votes, which are set to be updated by January 2011. She also called China's proposals for dealing with the global financial crisis "imprecise."

Over the past week, Beijing officials have said China, with nearly $2 trillion in foreign-exchange reserves, is willing to add funding for the IMF to increase the lender's ability to help countries hurt by the crisis. An agreement on putting more money into the IMF could be one of the most concrete achievements of this week's summit of the Group of 20, a gathering of the world's major economies.

The IMF is aiming to boost its war chest to at least $500 billion from $250 billion, and is already close to that goal. Japan has lent $100 billion, and the EU has committed €75 billion ($100 billion). Countries such as China and Saudi Arabia are being asked to help come up with tens of billions of dollars more to make up the difference. The U.S. is looking to chip in nearly $100 billion, but wants it as part of a separate kitty the IMF can tap in emergencies.

Beijing wants something in return for new funding. "China sees this as a good opportunity to increase its influence," said Jun Ma, China economist for Deutsche Bank. China doesn't want to miss out on the chance to help rewrite the rules that will govern global finance for coming decades. "China is more actively contributing their thoughts. This is very different from 10 years ago, when China was much quieter and more low profile," said Mr. Ma, who previously worked for both the IMF and the Chinese government.
China wants more IMF voting rights in exchange for any new funding, which most countries agree makes sense given its weight in the global economy. Chinese officials have also said the country could contribute in ways that don't require an immediate overhaul of the organization, for instance by buying bonds issued by the IMF.

An increase in China's IMF voting power would likely come at the expense of smaller European nations.

A stronger Chinese role at the IMF could also mean the institution might start going along less frequently with the U.S. and Europe. Because the current crisis originated in developed countries, China says the IMF should be able to more openly criticize their policies. "Under the current situation, we feel that the IMF particularly needs to strengthen its surveillance of the economic and financial policies of the major reserve-currency-issuing nations," deputy central bank governor Hu Xiaolian said last week.

China seems to want to strengthen and redirect the IMF, not undermine it. Central bank governor Zhou Xiaochuan's proposal last week for a new global reserve currency would give the IMF even greater clout. Mr. Zhou was a member of an outside panel of current and former officials who last week called for a "re-energized" IMF, concluding that "the world needs a multilateral institution at the center of the world economy to help anchor global financial stability."

The interest in bolstering the IMF is perhaps surprising given the sometimes rocky relationship China has had with the fund. The organization's reputation within Asia is poor, as many governments say the IMF gave bad advice during the regional financial crisis of 1997-98. Though China hasn't had to borrow from the IMF, many within China see the IMF as a tool the U.S. has used to criticize Beijing's currency and economic policies.

China has stepped up its participation in other international agencies. In January, China formally joined the Inter-American Development Bank, contributing $350 million to fund the agency's lending in Latin America and the Caribbean.

Incorporating China into institutions that have long been dominated by the U.S., Europe and Japan is bound to alter what has been "the fairly predictable context" for decisions on international economic policy, said Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development. "We have been producing consensus among ourselves in a generally like-minded community of countries which are very used to working with each other and talking to each other," he said in an interview in Beijing.

But China's positions have gained more credibility internationally because of its aggressive response to the economic downturn: Its stimulus plan is one of the biggest in the world.

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