All the way back in 1945, the Republic of China (not to be confused with the post-1949 People’s Republic of China) was a co-founder of the International Monetary Fund, along with 34 other countries. Moving on to the People’s Republic of China, however, it was only as of 1980 that IMF ties were established, for reasons which should be more than obvious to ChinaFund.com readers who are familiar with the past of this country as well as its oftentimes rocky start with respect to dealings with anything from nations to international organizations… such as, of course, the International Monetary Fund.
As time passed and China became more and more financially potent, however, the IMF represented yet another organization within which China wanted to become increasingly influential and, as pretty much always, this involved it essentially buying its way toward the desired level of influence. As a general rule, the greater the financial contribution to the International Monetary Fund of a certain country is, the more weight its votes cast.
Therefore, right from the beginning of the establishment of formal IMF ties (1980), China manifested its desire to increase its quota. The IMF agreed, with the increase in question bringing the grand total for China at that point in time to “just” 1.8 billion SDR. As impressive as the amount may seem, we need to understand that at this level, the 1.8 billion SDR represented anything but an achievement worth writing home about and more of a vital first step in building more and more influence within the IMF. Furthermore, this quota increase market an important development: the fact that China was awarded an IMF director seat, with the grand total being bumped to 22. Fast-forward to the present and the situation is remarkably different in terms of influence, with China’s quota representing a now-genuinely-impressive 30.5 billion SDR, a quota compelling enough for China to have a 6.09% voting power. Furthermore, another important development needs to be adequately addressed, this time one on the currency front: as of the 1st of October 2016, the Renminbi was included in the SRD basket of currencies, thereby becoming a legitimate IMF reserve currency. This “honor” is shared with four other currencies: the US Dollar, the Euro, the Japanese Yen and the British Pound.
In terms of “currency influence” as well as influence in general, it is worth noting that while impressive progress has been made since 1980 and China most definitely has a seat at the IMF’s most important table, it is nowhere near dominant. Its 6.09% voting power is vastly overshadowed by the United States and the same principle is valid on the currency front. While the Renminbi currently has a weight of slightly north of 10%, the value is almost four times greater for the United States Dollar and almost three times greater for the Euro, with China currently occupying position #3 of 5 (in front of the Yen and Pound).
It is important to make clear that China’s ascension to power represented a game-changer in light of the fact that we are dealing with a developing nation. As such, a valid case could be made that China effectively became the de facto ambassador of developing as well as under-developed nations over at the IMF. In fact, back in 2010, China made it crystal-clear that for the IMF to improve or even maintain its international legitimacy, giving more of a voice to developing and under-developed nations is most definitely a must, with China demanding that developing nations receive more in the way of voting power.
Why is this tidbit important?
Let’s just say that the overwhelming majority of observers are well aware of the fact that the IMF tends to have a bit of a love-hate relationship with the nations it is helping or trying to help. More specifically, whenever countries end up dealing with financial issues so debilitating that they lose market access, the International Monetary Fund becomes the lender of last resort… with the good, bad and downright ugly that is derived from this.
On the “good” side of the equation, nobody can question that there is a clear demand for an international institution that is willing to act as a lender of last resort by stepping in and offering financing to nations which, frankly, don’t have a real alternative. In an ideal scenario, this financing will represent enough of a safety net for the country in question to re-ignite its economic engines and ultimately regain market access. Furthermore, in light of the fact that the IMF oversees the economic changes that are taking place and sets conditions, some investors treat this reality as a positive sign, one which reflects the fact that the nation in question appointed an institution with a fair bit of experience to help with its finances.
On the “bad and downright ugly” side, however, the fact that the IMF doesn’t offer “no strings attached” financing and instead sets conditions pretty much always represented an extremely problematic aspect. More specifically, governments have continuously accused the IMF of imposing austerity policies which didn’t work instead of allowing governments to engage in for example public spending that might have jump-started the economy far more effectively.
As such, from the perspective of the general public as well as the politicians running the developing or under-developed nations which asked for assistance, the IMF represents a bit of a boogeyman. Some economic thinkers state that this criticism of the IMF makes sense and that, indeed, the Fund’s policies are too rigid, whereas others believe the opposite, that it is important for affected countries to swallow the “bitter but necessary” IMF medicine so as to get back on track and that governments accusing the IMF of excessive rigidity is nothing more than political theater (with the IMF used as a convenient scapegoat). Needless to say, IMF-related discussions tend to therefore become quite heated, with China oftentimes having the less than easy role of trying to see things through the lens of developing and under-developed economies, with the implications of this reality representing a topic for a future article or, of course, a topic worth covering even more granularly with our consulting clients.