New IMF chief almost guaranteed to be European

PUBLISHED : Friday, 20 May, 2011, 12:00am
UPDATED : Friday, 20 May, 2011, 12:00am


Even before Dominique Strauss-Kahn resigned yesterday as head of the International Monetary Fund, the battle to appoint his successor had already begun.

Traditionally, the IMF's managing director comes from Europe, and as often as not from France. But after the financial upheavals of the past few years, many non-Europeans believe it is high time the IMF chose its managing director from an emerging economy to reflect the developing world's growing power and influence over the global financial system.

In the past few days, countries including Brazil, South Korea, Russia, South Africa and Chile have all demanded that the IMF's next boss should come from the developing world. China, ever-guarded in its language, says the selection process should be fair and transparent, and the successful candidate should be chosen on merit.

That's a nice idea, but it's not how things work.

At first, it might seem there is a good chance that the next IMF head really could come from a developing country.

After all, under last year's round of governance reforms, China becomes the IMF's third-largest shareholder after the United States and Japan, with Brazil, Russia and India also figuring in the top 10.

As a result, the media are abuzz with possible developing world candidates, many of them from Asia. Among the names floated have been Singapore's finance minister Tharman Shanmugaratnam, former People's Bank of China deputy governor Zhu Min, and even former Hong Kong Monetary Authority chief Joseph Yam Chi-kwong, even though he has never run either a finance ministry or a real central bank.

Unfortunately, however, any hopes that developing Asia will provide the next IMF managing director are sure to be disappointed.

For one thing, the new shareholdings don't come into force until next year.

For another, the managing director is chosen not by the IMF's full board of governors, but by its 24-member executive board. And thanks to a quirk in the board's structure, its members represent blocs of countries. That means, for example, that the Italian director speaks for East Timor, while the Swiss member represents Kazakhstan. As a result, Western Europeans wield 34 per cent of the executive board's votes. With the US controlling another 17 per cent, rich Western countries will hold the balance of power in choosing the new managing director (see the first chart).

That means that despite bitter complaints from developing countries, the next head of the IMF is almost certain to be a European.

So it's likely that the headline in Tuesday's South China Morning Post that read 'Finding next IMF chief no easy task' won't prove strictly accurate. But the adjacent photograph of French finance minister Christine Lagarde pointing at herself could turn out to be strangely prophetic.

China sells US debt' screamed a headline in The Wall Street Journal this week, reviving fears that China may cut its holdings of US Treasury notes, precipitating a collapse of the US dollar bond market.

The only problem with the story is that there is no hard evidence China has been selling at all.

The story was based on monthly US Treasury data which showed a US$9.2 billion drop in China's direct holdings of US Treasury debt over March.

But these data are a notoriously inaccurate guide to China's true holdings, largely because China does much of its buying through banks in London.

The Treasury's annual survey of foreign holdings of US securities gives a better picture of China's position. Each June, it revises down Britain's holdings of Treasury paper, and revises up China's as debt bought through London is reassigned to its beneficial owner in Beijing.

This pattern indicates what has really been happening in recent months. As the second chart shows, while China's holdings of US debt have been falling, Britain's have been climbing steeply.

Based on past experience, this suggests that far from cutting its portfolio of US Treasury debt in March, China actually increased its holdings by around US$20 billion.

We'll have to wait for the June survey to get a better picture. But I'm prepared to bet that when it's published it will show that China holds around US$280 billion more US Treasury debt than the monthly data for March indicate, and that far from cutting its position, Beijing will actually have increased its holdings by around US$260 billion over the previous 12 months.