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The IMF Needs Fixing, and China Wants a Say

Posted by smeddum on November 18, 2008

The IMF Needs Fixing, and China Wants a Say
November 18,2008

by Xu Yisheng

What to do about the IMF? This, of course, was a question bandied about at the recent G20 Summit hosted by George Bush in New York last weekend, though no decisions were taken. Japan promised to throw a bunch of money at the Fund, which is sorely in need of it amidst the present world economic turmoil, and it was gently suggested that China might also like to contribute a portion of its oceanic foreign reserves.

Perhaps China should, but there seem to be a lot of questions it wants answered before it does.

To get some of these questions and other thoughts out into the air, Tsinghua University held an “Advanced Forum on Global Finance and Economy” on its campus on Saturday, Beijing time, some hours before the G20 Summit. Included in the discussion were four Chinese scholar/officials, all of whom have served in the IMF. They were: Dai Qianding, former IMF executive director; Zhang Xiang, former director of the People’s Bank of China’s (PBoC) International Department and IMF executive director from 1996 to 1999; Wei Benhua, PBoC counselor, former deputy director of the State Administration of Foreign Exchange (SAFE), IMF executive director from 1999 to 2003; and Wang Xiaoyi, currently deputy director of SAFE and IMF executive director from 2003 to 2006. Vivek Arora, IMF’s chief representative in China, delivered a speech at the Forum and the discussion of the four ranged from the present state of the fund to what they considered needed to be done with it.

United States will not give up leadership

Dai Qianding first pointed out that it is better to exist with the IMF than to have to try to exist without it, although he admitted that that is a hotly debated point. Without IMF, he said, US unilateralism would be even more formidable. In current multilateral institutions such as IMF, China has some force of containment on the US. Dai noted that reform is long-term, and China should gradually expand its right to speak through its own efforts.

Wei Benhua noted that the United States will use all means to maintain its leading position, while Europe will fight the US for dominant status, and both will ignore developing countries. China must understand this for its development in the future.

It is unreasonable, said Wang Xiaoyi, that countries active in the global economy and financial markets should play the leading role in IMF, and it needs to be improved. The USD accounts for 86% of global foreign exchange transactions. The euro and the dollar account for 50% and 34% of international bond storage, respectively, and 27% and 63% of global foreign exchange reserves. USD accounts for nearly 90% in the global trade settlement. While the status of USD in the global economy has been weakened compared to its position 20 years ago, it is still dominant.

“The United States won’t give up its leadership in international organizations because it will protect its interests in the global financial system.” Wang said.

Wang added that in the next few years, in terms of economy, trade, the status of international currency, economic openness and the development of financial markets, and so on, cooperation between the United Kingdom, Japan, China and other countries will gradually increase. From this perspective, it is inevitable and objective to increase the voices of those countries as well as those of developing countries.

New ideas on IMF formula share

In his speech, IMF’s Vivek Arora said that its current total capital is over $300 billion, of which the US contributed 17% and the cumulative share of the EU is 41%. Since major IMF decision-making requires at least 85% of the vote, the US has the voting weight to make it the sole country with a one-vote veto.

“The current voting weight of China in IMF is about 4% and China’s economic volume accounts for about 5% in terms of exchange rates in the international market, and 11% in terms of to purchasing power parity. Other countries have similar circumstances, for example, Mexico, South Korea, and Turkey. Voting rights of countries in the IMF should also be adjusted accordingly with their economic power ranking in the world,” Arora said.

However, Wei Benhua said the IMF voting formula in essence doesn’t change despite discussion on it every five years and requests of developing countries about it are not considered.

Wei said it is right that IMF capital formula share takes economic strength instead of population factor into consideration.

Besides voting weight, Wei also said that China should strive for a position in high IMF management or department director to increase its internal influence. IMF currently has a president, four vice presidents, and a chief economist, similar to the World Bank.

In favor of increasing IMF funding

Arora pointed out IMF needs sources of adequate funding, not only from economic powers but also from countries with abundant foreign exchange reserves, and that would have a significant impact on voting allocation in IMF.

Wei Benhua agreed, and said that China is in favor of capital injection into IMF for its operations.

“In the face of global crisis, the traditional point of view that balance of payment difficulties occur only in the field of trade and that the financial support it needs is limited must change. The current financial crisis is spreading quickly to almost every aspect of finance and affecting the tangible economy. The funding support it needs is great.” Wei said that he supported increasing IMF’s capital and that this is a good chance for China to increase its share.

Zhang Zhixiang said that every 5 years IMF assesses its capital scale. The current capital in IMF is about $300 billion, but now with the present financial crisis the fund needs to be much bigger.

“However, it is hard to say how much is enough. IMF is neither the world’s central bank nor the global lender. The issue of capital increase needs better assessment,” Zhang said.

The issue of regulatory reserve currency

Zhang Zhixiang said that the current international financial crisis has highlighted a particular issue, i.e., the major reserve currency can not be based on the credit of a single country, and there should be an objective yardstick by which to measure it.

“International monetary system adjustment should start from this. To identify the growth of a reserve currency, there should first of all be objective criteria,” Zhang said. The dollar was linked to gold before, but now that is gone. The so-called warning mechanism in the international financial system is an indication of the inflation of main reserve currency.

Wang Xiaoyi believes that the international financial system should change, and the role of regional currencies should be enlarged. At the international level, the IMF can remain. But reform is needed and measures supporting reform also need to be taken.

“US veto power should be removed. Although the developing countries can not be dominant or account for half the weight (they now account for about 30%), cancelling the veto power of the US will change the leadership of IMF and give emerging market countries a stronger voice,” Wang said.

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