China and the IMF

[caption id="" align="aligncenter" width="300" caption="Banker reading to child in bed."][/caption]

As I've said in yesterday's entry, it is expected that the IMF will at least double its budget to $US500 billion to deal with the increasing toxic assets from banks, especially recently emerging ones from banks in central and eastern Europe. This issue will be one of the themes of next week's G-20 leaders meeting. But the concern is how to refund the resources of the IMF. The answer of this tricky question is relied on some dynamically emerging economies such as China, India, Russia and Brazil. Whereas the EU accounts for 32 per cent of IMF's budget, the US 17 percent, China's stake is only 3.7 per cent. So for the bigger institution where the world are currently working together and specifically for their greater voting rights, developing countries has to share the bigger stakes in IMF's resources.

Among the developing world, why is China a better place to rely on? It is because of China's sound fiscal position, low public debt burden, huge surplus and significant amount of foreign currency holdings (which was about $US2 trillion in last year).

However, playing an increasingly important role in global financial ground China also realizes that how risky it is when putting up more cash on such an instrument of some wealthy nations which are now injured the most by the current economic tumour. China wants an international economic order less dominated by the US and several other developed countries. Moreover, the unique role of the US dollar as the world's standard bothers China's leaders much.

As reponse to the financial crisis and to the near-coming G-20 summit, China central bank governor Zhou Xiaochuan has proposed the creation of a new global reserve currency in place of the US dollar, according to The People's Bank of China. He explained that China has been holding a great deal of US government bonds, together with a huge amount of foreign currency reserve on its account; therefore, any fluctuations in the value of the dollar and changes in US economic policies will have a sharp influence on China economy and the exchange rates. In short, China wants more control on the factors which drive its national fund. It wants more freedom on this anti-monopoly ground. Of course, Obama's administration (and Kevin Rudd also) rejected the Chinese call.

(In fact, the prelude of using a world single currency was the use of SDRs, which stands for "special drawing rights". It was created by the IMF in the 1960s and is valued by a basket of major currencies such as US dollar, the euro, Japanese yen and the pound.)

Although Mr Zhou's suggestion is unfeasible in a short- to-medium term, this idea shows the China's desire, or even request, for having a louder voice on the debating table.

Update (26/3):

• After the Chinese call about the replacement global currency, Obama, Geithner (Treasury Secrtary) and Bernanke (chief of Federal Reserve) showed their defence behind the greenback yesterday. Also, economists assert that the shift away from dollar would create a great credit turmoil.


• China presently holds about $US1 trillion in US debt and $US1.95 trillion inits total foreign reserves.