Yesterday China upped the pace of the power shift from a US-dominated world monetary order, to a more global one. China and its Asian partners have just announced their strengthening of a $120 billion emergency currency pool. This is evidence of a new Chinese strategy unveiled in recent weeks and comprising three elements:
- substantial reform the IMF;
- the growth of a powerful Asian alternative to the IMF; and
- a world currency.
Reforming the IMF: As the IMF scrambles to find resources to maintain its role as lender-of-last resort, China has signalled – in a speech made by Premier Wen Jiabao in March – that its contributions to the IMF’s efforts will be contingent on reforms which give more voice to developing countries. At present, powerful countries have conceded only marginal reforms in voting power in the IMF. Their agreed proposals have been outpaced by recent events, as indeed are the recommendations of a recent high-level panel report to the Managing-Director.
It is worth highlighting that while China is politely offering something to the IMF (it announced a contribution of $40 billion), it has just announced an almost equivalent contribution ($38.4 billion) to the Asian pool.
An Asian Alternative: Asia’s alternative to the IMF emerged from the crucible of the East Asian Financial crisis. While the US publicly torpedoed the bold idea of an Asian Monetary Fund, Asian officials quietly agreed bilateral swaps arrangements among themselves. It is these arrangements which have been steadily developed into the Chiang Mai Initiative. This was further strengthened at the annual meeting of the Asian Development Bank this past week when China, Japan and South Korea each committed more resources.
As a result the ASEAN+3 countries have created for themselves an alternative to borrowing from the IMF. Their arrangements actually use the IMF as a monitor, but crucially guard control (within the region) over their shared reserves. It has emerged in no small part because countries in the region see the IMF as a useful but American instrument of economic coordination.
A world currency: In mid-March 2009, China’s Central Bank Governor surprised the world by proposing that the US dollar be replaced by an international reserve currency. In an essay posted on his institution’s website, Zhou Xiaochuan emphasized the potential stability of a global currency as contrasted with the deficiencies of a “credit-based national currency”.
The strains on the dollar have become all too apparent as the US tries simultaneously to maintain global demand for the dollar (which enables it to print more dollars, and thereby to fund its deficit), and to support its exporters. The first requires a strong dollar, the second requires a weak dollar. No surprise then that the dollar is under strain and that no other currencies are lining up to become the world’s reserve – a point I made recently in a documentary for the BBC.
There is a long-term logic to Governor Zhou’s proposal, as the US Secretary of the Treasury initially recognized. The subsequent flurry of panic in Washington DC obscures what in the long term is likely to be a sensible proposition as much for the United States as for its global economic partners.
China’s new found confidence in addressing global economic governance is likely to spur policy-makers on both sides of the Atlantic to get serious about addressing major issues of governance reform, emergency lending, and exchange rate cooperation. Where years of developing country efforts have failed to push this debate, China’s potent combination of pushing for reform and at the same time bolstering challenging alternatives is likely to finally have purchase.
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