China, setting out its stall for the next global financial summit, wants the International Monetary Fund to get tougher with developed countries that let their economies run off the rails.
In a position paper prepared for the April 2 meeting in London of the Group of 20, China calls for more power for developing countries in the IMF and World Bank and issues a warning against investment protection.
On financial regulation, the memo says accounting standards and credit ratings should be adjusted to contain the “pro-cyclical” bias of financial institutions to ramp up lending and investment when times are good, leading to excessive risks. The paper, seen by Reuters, also calls for hedge funds to be regulated and for excessive leverage and pay to be curbed.
Although it is the world’s third-largest economy, China has kept a relatively low profile in the debate on what reforms are needed to avert a repeat of the current credit crunch, which has plunged much of the world into recession.
The bulk of the paper, which the government circulated last month to diplomats, is uncontroversial, dwelling on the need for greater information sharing and policy coordination. But the section on the IMF touches a raw nerve because of China’s belief that the Fund spends too much time lecturing developing countries on how to run their economies.
According to this line of thought, the Washington-based fund could have tempered the present crisis by sounding the alarm earlier and louder about the economic imbalances building up in rich countries, notably the United States, whose voting share gives it the power to veto the most important IMF decisions.
“The IMF should strengthen oversight over macroeconomic policies of all parties, particularly the major reserve currency economies, and provide oversight information and improvement recommendations to its members on a regular basis...” the paper says.
Diplomats say China has still not forgiven the fund for introducing new currency surveillance rules in June 2007, at Washington’s behest, that make it easier for it to determine whether a country is keeping its exchange rate fundamentally misaligned to boost exports. Beijing objected to the rulebook, regarding it as a US ploy to enlist the fund in its campaign for a stronger yuan.
The dispute flared up again last month when incoming US Treasury Secretary Timothy Geithner charged China with "manipulating" its exchange rate. Beijing rejected the claim. “It is probably not the right time to focus on the Chinese exchange rate given that it is not a central element of the world crisis,” IMF chief economist Olivier Blanchard said on January 28.
Still, controversy over the yuan has delayed completion of the IMF’s 2007 and 2008 reports on its regular economic consultations with China.
China has also conspicuously failed to take up a suggestion that it use its $2 trillion of foreign exchange reserves to ease the IMF’s financial strains.
Japan, by contrast, has said it will lend the Fund $100 billion so it has enough cash on hand to bail out countries felled by the credit crisis. In its G20 position paper, China says voting power in the IMF and World Bank should reflect changing weights in the global economy so that developing countries have a louder voice.
On this score at least, Beijing sees eye to eye with Washington. “We need to send a strong signal that we are ready to give developing countries a voice within the IMF that is commensurate with their importance to the world economy,” Geithner said last month.
China said it favored inviting regional organizations such as the African Union to the London meeting of the G20, a group of developed and emerging economies whose leaders held their first financial crisis summit in Washington in November. (Reuters)