Is Beijing willing to bankroll the IMF?
The central government's announcement this week that it will spend the equivalent of US$586 billion over the next two years to boost economic growth has been widely welcomed as a timely injection of fiscal stimulus into Asia' s second-largest economy. But will China go further and use some of its nearly US$2 trillion in foreign exchange reserves - by far the world's biggest - to bankroll an expansion of the International Monetary Fund?
As countries follow companies as victims of the global credit crisis, currency turmoil, and deepening recession, the IMF has re-emerged as an important stabiliser of the financial system. In the Asian crisis of 1997-98, the IMF lent US$35 billion to Thailand, Indonesia and South Korea to help them shore up their currencies and economies. However, it attached harsh and unpopular conditions, which contributed to political instability and the resignation of Indonesia's long-serving president Suharto.
This time round, the IMF is taking a more nuanced approach. It recently set aside US$100 billion for short-term loans to emerging economies dragged into the contagion through no fault of their own. No conditions are attached to the loans, which a recipient could use to defend its currency, recapitalise banks or cover import bills.
At the same time, the IMF is continuing to make emergency loans to those of its 185 member states that need them. They have so far been in Europe, not Asia or Latin America. The IMF has provided nearly US$44 billion to Iceland, Ukraine and Hungary, but insisted on cuts in government spending and other belt-tightening measures it believes will contribute to the success of the stabilisation programme. Belarus and Pakistan are negotiating loan terms with the IMF, and several other East European countries may follow.
Collectively, these programmes will account for well over half of the US$250 billion that the IMF can call on quickly to help its members. If economic conditions continue to deteriorate in many parts of the world, and some of the larger emerging economies turn to the IMF for assistance, it may not be able to offer timely support. Some economists have suggested the IMF needs a funding pool of up to US$2 trillion if it is to be an effective lender of last resort to countries.
Expanding the pool of capital available to the IMF will be one of the items on the agenda when President Hu Jintao and other leaders of the Group of 20 advanced and emerging economies meet in Washington this weekend to discuss how to reshape the global financial system. British Prime Minister Gordon Brown has said he believes there is an opportunity for oil-rich nations and Asian trading countries with large foreign exchange reserves to step in to buttress the IMF, strengthening its surveillance operations as well as its emergency lending.
This group of states now holds the bulk of global reserves. But would the US and European governments, which have traditionally dominated the IMF and its sister organisation the World Bank, really want such an injection of capital, as it would have to be accompanied by a shift in voting power away from the west towards the new benefactors.
Under present rules, each IMF member state contributes a quota of money, to which their votes on the governing board are roughly proportional. China's quota is 3.7 per cent of the total amount of money on deposit with the IMF while Germany has 6 per cent, even though China is on course to overtake Germany as the world's thirdbiggest economy after the US and Japan. The US quota is just over 17 per cent of the IMF total. Europe holds a little above 39 per cent and Japan 6 per cent. Asian countries together have 25 per cent.
If China is asked to stump up more money for the IMF, it would surely expect more voting power in return.
Michael Richardson is a visiting senior research fellow at the Institute of Southeast Asian Studies in Singapore. firstname.lastname@example.org