During the G20 Summit in Los Cabos, Mexico, China and several other emerging economies pledged to raise their IMF contributions. This not only marked a major achievement from the meeting, but also demonstrated the growing role of the emerging economies on the world economic stage. It also signified the willingness of the emerging economies to pull Europe and the world as a whole out of the current crisis by enhancing their IMF contributions.
To fight the global financial crisis, the IMF got its war chest refurnished by US$750 billion in 2009. With the continuous worsening of debt crisis in the Eurozone, however, the Group of 20 countries pledged at its spring meeting in April to supply the body with extra firepower, with European countries to offer a major part of the addition.
At the Los Cabos summit, China offered US$43 billion, while Brazil, India, Russia and Mexico each pledged $10 billion. Japan also agreed to contribute US$60 billion. As a result, the total pledges to the IMF have gone up from US$430 billion in April to US$456 billion now.
China’s IMF contribution decision is a major economic and diplomatic move of multiple-layered meaning.
First of all, help to Europe is help to China itself, from a strategic perspective. One obvious purpose of this latest boost of the IMF’s resources is to help Europe put up a debt crisis-preventing fire wall, a continent that has been China’s strategic partner on all fronts. Through the IMF, China may help Europe rein in the spread of its debt crisis and stabilize the euro, thus securing an option other than the US dollar and winning a greater room of maneuver in the international monetary system.
Second, the move will help the IMF in its effort to improve the system of global governance. The IMF is an important body devoted to the governance of the world economy. For its limited resources, however, the IMF can only come to the rescue of some developing countries not so big in terms of economic scale. But once a debt crisis comes to gnaw at a developed economy, it will feel too strained to help. Should the IMF fail to play its role, the world economy will fall into disorder, with each country applying begger thy neighbor policy, protectionism will come back again, and the global economic climate going from bad to worse, as was the case before the two world wars. As a responsible member of the world community, China is obliged to contribute its due to the maintenance of the system for the governance of the world economy.
Another benefit of China’s IMF offer is to ensure the safety of its investment. China’s IMF contribution is a type of secured investment instead of a charitable donation. All IMF contributions by its members are investments, with fixed returns. When a debt-laden country has to restructure its debts, it must repay the IMF loans first, in most case, unlike in the case of private investment. Some eurozone countries are now suffering from a debt crisis, with their bonds becoming too thorny to handle: handsome in yields, but definitely risky of default. China’s option to help any one of these countries by buying its bonds will surely sow discord among eurozone member countries, and expose itself to great risks. The eurozone countries once thought of creating a financial-stability mechanism and issuing special eurozone bonds to raise funds. These bonds, if issued, might have been of quite some interest to China. Regrettably, this plan has never gone ahead due to difference of opinion among the eurozone members. To help Europe in a roundabout way – through IMF contribution addition, has become China’s secondary choice, as a result.
Last but not least, the move will increase China’s weight in global governance decision-making in the future. IMF is a body keeping watch of the international monetary system, in which the member country gets the greater voting power that contributes more. When a member ups its contribution, however, it may not get a raise of its voting power immediately. In other words, China and the emerging economies will surely get greater voting powers in the IMF in the future. After all, the composition of all international bodies including the IMF will change over time with the evolution of the world economic pattern.
Ding Yifan is deputy director of the World Development Research Institute of the Development Research Center of the State Council
