Can China crack US hold on IMF?

By Satur C. Ocampo
At Ground Level | The Philippine Star

This week in Cannes, France, the Group of 20 biggest economies or G-20 – representing 85 percent of the world’s economy, 80 percent of trade, and two-thirds of population — holds its sixth summit meeting since 2008 to deal with the global financial-economic crisis.

The focus is on China’s response to the European Union’s appeal for funding support to contain the sovereign-debt turmoil that has hit Greece gravely, threatens to spread into Italy and Spain, and rattles the euro-zone monetary system.

Will China decide to help? More engrossing, what are the conditions it may demand in exchange? These are likely to spell epochal changes in China’s international economic standing and in the way the International Monetary Fund has been run in the past 66 years.

After approving last week a second rescue package for Greece, the EU, through French President Nicolas Sarkozy, called on President Hu Jintao for China to boost the European Financial Stability Facility (rescue fund) to a trillion euros, equal to US$1.4 trillion. Italy and Spain expect to be aided by the EFSF.

Europe cannot count on Germany, its economic powerhouse, or on the European Central Bank, for more funding. With an 80 percent debt-to-GDP ratio, Germany cannot lend much. And the ECB, unlike the US Federal Reserve Bank which is a “lender of last resort,” isn’t authorized to provide unlimited emergency funds to governments and banks.

Normally, the EU could depend on the Unite States for support. But these are not normal times; the US is mired in its own financial and economic woes.

The best hope is China, which holds the largest foreign exchange reserves in the world: US$3.2 trillion. Earlier, China shored up the US against financial collapse by buying $1.15 trillion in Treasury securities. The US debt of $14.3 trillion almost equals its gross domestic product ($14.6T), which hobbles the superpower’s recovery efforts.

Offhand, China has shown no eagerness to further use its huge reserves abroad, as it grapples with internal economic problems: growing concern over inflation, a threatening property bubble, and the widening income gap between the few rich and the vast poor of its billion-plus population.

Yet there are factors influencing China to respond positively to the EU plea.

One, Europe is China’s biggest export market; helping rescue the financially-drowning member-countries will serve Chinese interest. Two, Chinese firms operate the biggest shipping port in Greece; they have built, under BOT terms, highways and other infrastructures in Europe.

More than these factors, China is given a great opportunity “to exert power to obtain direct and concrete benefits” if it helps the EU in either of two ways: 1) by “back-stopping” the EFSF or buying Italian and Spanish bonds (as it did with US securities), or 2) providing additional funds to the IMF for lending to Europe.

These suggestions come from Arvind Subramanian, author of the book, “Eclipse: Living in the Shadow of China’s Economic Dominance,” in an op-ed piece in the International Herald Tribune. He advises that China take the second option and, in return, demand “nothing less than a wholesale revamping of the governance of the IMF to reflect the current economic realities.”

Governance reform can no longer be just about the nationality of the IMF’s managing director — always a European — Subramanian emphasizes, “but should fundamentally be about who will have the greatest voice and exercise the most power in the new world.”

At present, the majority of IMF shares are held by the Group of 7 (US, UK, Germany, France, Italy, Canada and Japan) — the G-20’s core. This has enabled the US, as G-7 leader, to exercise veto power in the last six decades because, under IMF rules, important decisions require a vote representing 85 percent of the shares.

Last year some G-20 members tried to redress this imbalance. They moved to reduce the G-7’s overwhelming control in the IMF governing body by shifting to them at least five percent of the majority quota shares. Although the G-7 acceded, no decision was taken at the IMF annual meeting in October 2010.

Even if it was approved, that move couldn’t have eliminated the US veto power.

However, as Subramanian suggests, by substantially raising its shares China can gain equal veto power as the US, and probably a greater status than the EU, in managing the IMF.

That won’t sit well with the US; it’s not ready to ease its tight grip on IMF policy-making, or share power with China. But Subramanian argues that such step is along what the US wants — to “tether China more firmly to, and create a stake for it in, the multilateral system.”

The alternative is worse, he points out, adverting to China’s successful bilateral economic ventures worldwide: “A China that uses its might bilaterally to gain narrow political advantages would be a worrying portent for the future when China becomes economically bigger and stronger.”

That probability is foreseen by the economists of PriceWaterhouse Coopers in their study, “The World in 2050.” By 2050, they predict, the US will have slipped to being the No. 3 largest economy, with China as No. 1 and India, Brazil, Mexico, and Indonesia all in the top 10.

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