Page 1 of 2 China discovers value in the IMF
By Peter Lee
China's fraught relations with the International Monetary Fund are driven by
two conflicting agendas - the country's effort to gain unimpeded access to
resources in the developing world on bilateral terms, and its interest in using
the IMF's facilities as a international organization to issue Special Drawing
Rights (SDR) assets to help Beijing diversify away from the US dollar.
At the same time, the West is trying to incorporate China, Brazil, Russia and
India, the "BRIC" countries, into the IMF system and thereby assert the
continued relevance of Western financial institutions and leadership in the
midst of the worst crisis since the modern international regime was created
after World War II.
There is a growing sense of urgency behind China's engagement
with the IMF as America's enormous recession-fighting budget deficit causes US
bond yields to creep up.
The world is starting to share Beijing's publicized anxiety about inflation
eroding the value of the dollar and is beginning to think about the unthinkable
- a future in which the US dollar is gradually stripped of its historical role
as the international currency and something else, maybe the SDR, replaces it.
The potential exists for an important evolution in the function of the IMF - if
the Barack Obama administration can keep its eye on the ball and overcome
Republican opposition.
The International Monetary Fund and the People's Republic of China do not make
for an easy fit. In fact, it's hard to think of two institutions further apart
in philosophy and practice than the IMF and the PRC.
In Asia, China's continued economic success during and after the Asian
financial crisis of 1997-98 is an open rebuke to the monetary and exchange rate
policies promoted by the IMF as the solution to the region's ills.
In the southern hemisphere, China has sold itself as anti-IMF, providing needed
investment to ostracized regimes without onerous calls for reform. Now, the
global financial system has experienced a major failure triggered by abuses in
the developed countries that once used the IMF as their monetary and financial
lawgiver to the developing world, and the BRIC countries are being called upon
to help save the IMF's bacon.
China cares enough about the world financial system not to let it go down the
tubes and is willing to support the IMF in its role as bailout provider of last
resort to the hapless European economies like Latvia and Iceland that followed
the Wall Street pied piper to financial oblivion.
At the Group of 20 summit in London this spring, China pledged to pony up US$40
billion to do its part in a joint international effort to boost the IMF's
lending capacity by $500 billion. But China's engagement with this fading relic
of American financial dominance is cautious, equivocal and, it appears,
somewhat self-serving.
The IMF and China have been going head-to-head in the developing world. The IMF
and its sister project lending organization, the World Bank, have historically
demanded conformity to Western requirements for transparency, deregulation, and
denationalization - structural reforms - as a precondition for financial
assistance. As long as the West was able to maintain a de facto monopoly on
foreign assistance this approach won the acquiescence of the targeted states -
if not happy economic results.
However, when the Chinese government offered an alternative - one that took the
form of a bilateral negotiations between equal sovereign states - developing
nations were eager to take it.
Bush misses Africa play
The story of how the George W Bush administration took its eye off the
geopolitical ball and allowed the Chinese to steal an economic and diplomatic
march in Africa is now the stuff of legend. The case of Angola - where China
blew an Italian bidder for an oil concession out of the water with a
pre-emptive $2 billion infrastructure credit - is cited as the world's wake-up
call. Now Angola has eclipsed Saudi Arabia as China's largest supplier of oil.
China's success in Africa has compelled the IMF to do a little soul searching.
Case in point: the revealingly named Exogenous Shocks Facility, intended to
provide rapid assistance to developing countries crushed by the collapse in the
international economy through no fault of their own.
The IMF also excited a flurry of enthusiasm when it announced that it would
abandon the structural reform requirements that are the hallmark of its
detested and counterproductive interference in local economies. However, it
turned out that the structural reform requirements have only been waived for a
select group of countries already meeting the IMF criteria, so that a round of
paperwork can be eliminated.
It appears that the IMF is trying to work through the crisis as an isolated
anomaly, not a sea change in the structure of the international economy and a
power shift away from the United States and Europe model of open-market
globalization to the rise of a network of Chinese-style, managed, bilateral and
multilateral trading arrangements in goods and services.
The IMF has not endeared itself to Beijing as it has championed the interests
of Western creditors, the US government, and American and European mining firms
to pressure the government of the Democratic Republic of the Congo to
renegotiate one of China's biggest overseas resources deals - a $9 billion
infrastructure project for copper and cobalt transaction.
China's ambassador to the DRC angrily characterized the IMF's stance as
"blackmail". Yu Yongding of the Chinese Academy of Sciences was undoubtedly
reflecting internal official attitudes to the IMF when he spoke to China Daily
in the run-up to the G-20 conference: "They [developed countries and pressure
groups] have already targeted our wallets but we have many reasons to object,"
said Yu, a formal central bank advisor. "If we do so, it will seem like the
poor is rescuing the rich, wouldn't it?"
He added that China's friends in the developing world have cautioned against
giving loans to the IMF. "Even if you do decide to do so, the sum should not be
big," Yu quoted them as saying.
Reuters also picked up on the story, describing a white paper critical of the
IMF's coddling of rich states that the Chinese government circulated prior to
the summit:
[The] section on the IMF touches a raw nerve because of
China's belief that the Fund spends too much time lecturing developing
countries on how to run their economies.
According to this line of thought, the Washington-based fund could have
tempered the present crisis by sounding the alarm earlier and louder about the
economic imbalances building up in rich countries, notably the United States,
whose voting share gives it the power to veto the most important IMF decisions.
"The IMF should strengthen oversight over macroeconomic policies of all
parties, particularly the major reserve currency economies, and provide
oversight information and improvement recommendations to its members on a
regular basis ... " the paper says.
Diplomats say China has still not forgiven the fund for introducing new
currency surveillance rules in June 2007, at Washington's behest, that make it
easier for it to determine whether a country is keeping its exchange rate
fundamentally misaligned to boost exports. Beijing objected to the rulebook,
regarding it as a US ploy to enlist the fund in its campaign for a stronger
yuan.
Insurmountable bias
The Chinese consensus appears to be that the IMF's pro-Western bias is
institutionalized and, for the time being, insurmountable. The key advantage of
the developed countries resides in the fact that important decisions require an
85% vote.
The United States holds a 17% voting share, giving it a veto. Even if the US
vote share dropped below 17%, the change would be more symbolic than real
unless there was also a massive shift in voting rights away from US allies in
Europe and Japan to the BRIC countries and the developing world.
Not surprisingly, China is already looking beyond the IMF to a new regional
grouping to provide financial support to Asian economies.
On May 29, 2009, Forbes reported:
A key breakthrough came early this
month when ASEAN plus three, [the Association of Southeast Asian Nations plus
China, Japan and South Korea] ... finally agreed in Bali to create a US$120
billion regional reserve fund. The deal came after China and Japan, the two
largest contributors to the fund, buried their hatchets and agreed to each fork
out an equal sum, or 32% of the total needed to create the fund.
If the regional reserve fund succeeds, it would represent the first regional
institution in Asia that is blessed with real financial power and with teeth to
enforce discipline among members. But the hard part is only beginning, with
negotiations to set up a multilateral surveillance institution now under way.
The success, or the lack of it, will determine how far Asia will move towards
regional integration. Hadi Soesastro, senior fellow of Jakarta-based Centre for
Strategic And International Studies, said the new institution wasn't designed
"to replace the IMF, but to supplement it."
Given this context,
it is not surprising that China's engagement with the IMF is a matter of
situational advantage, not enthusiastic endorsement. Nevertheless, Beijing's
pursuit of its priorities might bring revolutionary changes to the IMF.
Beijing appears most interested in exploiting the IMF's desire for increased
cash and continued relevance as a means of reducing China's exposure on the
inflation-threatened US dollar.
US inflation is a major concern of the Chinese government. The US budget
deficit in 2009 will reach an eye-popping 12.9% of gross domestic product. The
IMF (irony alert) endorses a 3% cap for states with their financial house in
order.
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