China and the International Monetary Fund
Play
A few months ago, the head of the International Monetary Fund (IMF), Christine Lagarde, threatened to perform a "belly dance" if the proposed governance reforms of the IMF weren't backed by the United States, which has veto rights over such measures.
She warned that the matter was urgent as the reforms are a precondition for much-needed additional funding from the IMF’s member countries.
However, she was ignored by US lawmakers and the reforms weren’t included in Congress’ recent omnibus spending bill.
So now Lagarde says the IMF will have to discuss “alternative options” at its executive board meeting next month. This implies the IMF will make the changes even without the support of the US.
The reforms are important for Asia as their purpose is to give China, along with other Asian and emerging market countries, a bigger say in the IMF’s affairs.
China has only 3.8 per cent of voting rights in the IMF, despite accounting for 12.4 per cent of world GDP. Under the reforms, China would receive more voting rights in return for a greater financial contribution to the fund.
While China hasn’t explicitly said what it wants to change at the IMF, it’s likely that the fund’s policies would be softened to make them “more appropriate for emerging market policies”.
For example, countries that need the IMF’s support or a bail-out would have a more flexible timeline to implement IMF policies such as privatisation of state enterprises and liberalisation of currency and capital markets.
China also wants the IMF’s role in the global monetary system to be strengthened. China has long advocated less reliance on a single reserve currency – the US dollar – and a move towards a reserve system based on a basket of currencies.
The IMF already has special drawing rights, which include the US dollar, euro, yen and pound sterling.
China would like the yuan to be included in this basket of currencies and an important step in this direction will take place late next year when the IMF considers the composition of the SDR basket.
The planned changes to the IMF, along with the creation of the Asian Infrastructure Investment Bank, another Chinese initiative, form part of a bigger picture, which is an alternative international financial framework with a stronger Chinese flavour.
Congress may have missed out on Christine Lagarde’s belly dance, but what she does next will still be worth watching.
For more columns in this series please see www.bangkokbank.com
