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China moves into reserve position
By Laurence Brahm
Bankers and economists in Beijing are saying that the Washington Consensus is
dead. [1] US Treasury Secretary Timothy Geithner awoke to this during his
recent China trip. Addressing a Peking University student audience he declared,
"In the United States, we are putting in place the foundations for restoring
fiscal sustainability." When he said that China's assets were "very safe in
Washington," students laughed.
The tectonic plates of the global financial system have shifted. The
post-colonial order created at Bretton Woods irreparably cracked, together with
Wall Street, in September 2008. Time has come to replace it.
An early move in that process began on March 23, when China's central bank
governor Zhou Xiaochuan called on the International
Monetary Fund to expand the basket of special drawing rights (SDRs). The next
move occurred on May 3, when China, with Japan, South Korea, and the
Association of Southeast Asian Nations, announced a US$120 billion regional
currency stabilization fund, expected to be renamed the Asian Monetary Fund.
China is pragmatic. The lesson from its economic transformation is that there
are no models and people know what works best for them. No single economic
model is necessarily correct for all developing countries. Moreover, those
rising out of poverty could not care less about adherence to models. China has
proved that consultants from the International Monetary Fund (IMF) and World
Bank are not needed, and local solutions can work more effectively than
imported ideas. Developing nations now want to set a new agenda for themselves.
They began to do that June 16, when Brazil, Russia, India, and China (known
collectively as the BRIC nations) met in Yekaterinburg, Russia, to discuss
settlement currency options to the US dollar. The dollar fell sharply the next
day. On June 19, China's central bank issued its 2009 China Financial Stability
Report. Suggestions included decoupling from the dollar and calling for a
supra-global currency. The next day, the dollar dropped again.
That makes politicians and analysts in Washington squeamish. Many are concerned
about and guessing what kind of global financial order China envisions, and the
role it wishes to play.
China is finding out for itself. Its leaders react to change rather than
orchestrate it. Their paramount concern is domestic stability. They race to
secure resources globally to fuel the high growth rates. Social factors other
than consumption are dismissed as politically inconvenient. China is not driven
by a visionary agenda, but by the practical need to secure resource imports and
commodity exports through stabilization of the dollar. With stability
precarious, China is seeking alternatives. The yuan settlement agreements and
recent dollar asset sell-downs are practical responses to China's predicament.
China is on the cusp of becoming very developed, with the economic clout to
have a global voice. While no BRIC nation believes it will become the next
superpower, each wants a say in building a new consensus. Current circumstances
are an opportunity to re-engineer a multi-faceted financial order stabilized
through its diversity. Regionalism is on the rise.
It will be four years before the IMF can undergo the "structural adjustment" it
has preached to developing countries. But China knows better than everyone else
that there is always a way around bureaucratic rules. If you cannot become a
shareholder, then be a creditor. So when the IMF decided on July 1 to issue
$150 billion in SDR bonds, the BRIC nations bought in, with Russia and Brazil
purchasing $10 billion each, and China taking the lion's share, an additional
$50 billion.
This is the first IMF-issued bond that is sensitive to the dollar. Beijing's
purchase of IMF bonds represents a shift by openly reducing dollar assets. The
BRICs' underwriting of this SDR bond issue is a clear step toward creating a
global reserve currency. By buying one-third of the issue, China becomes a
creditor of the IMF, and gets more say in the institution.
China has reasons for wanting leverage. The IMF is often charged with being the
tool of US policy; China may be about to change the global financial
architecture by financing the IMF into compliance on issues that irk Beijing.
The IMF has continuously called on China to adjust its currency upward. The
IMF's recent Article No 4 Consultation Report accuses China of undervaluing its
currency and calls for the revaluation of the yuan. China refuses.
Chinese economists feel this crisis gives China room for further financial
reform. Within this context, China's yuan will rise and become the
international currency. At least that is what many in Beijing think; others are
skeptical and feel the dollar can't be replaced in the short-term as the global
reserve currency. They warn that promoting such an idea is detrimental to
China's relations with the US. Nonetheless, China's economic leaders agree that
the SDR should one day replace the dollar as global reserve currency, even
though the debate over when this occurs continues.
China has given the developing world a new response profile. Rather than argue
with the IMF policy, make the IMF your debtor. The IMF has little choice but to
listen. At any rate, the United States and Europe cannot afford to purchase the
IMF's new SDR-issued bonds. China can. Bretton Woods established the IMF as the
world's bank of reserve. It looks like China is positioning to become the bank
of reserve to the IMF.
Notes
1. The term Washington Consensus has come to be a synonym for market
fundamentalism, or laizzez faire economics, after initialy being coined in 1989
by John Williamson to describe a set of prescriptions he considered should
constitute the standard reform package for crisis-wracked developing countries.
Lawrence Brahm (laurence@shambhala-ngo.org) is the founding
director of the Shambhala Foundation.
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