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A Chinaman in the IMF!

The news about the appointment of Dr. Zhu Min as Special Adviser to the Managing Director of the IMF has been greeted with excitement in developing countries, especially China. Many journalists and analysts look upon it as “a move signalling China’s rising clout in the global financial arena.” (ShanghaiDaily.com, 26 February 2010.) The People’s Bank of China (PBoC) said, “Emerging markets and developing countries are showing a bigger role in the global economic system” and “that is why taking in more professionals from these nations is part of the key steps for global financial bodies to better their management when facing a changing world economic landscape.” It went on to add, “His unique experience brings him a deep knowledge in macroeconomic management, financial regulation and supervision and financial markets. His service at the World Bank and other international financial institutions also adds to his rich experience in the field of international finance.” China’s Commerce Ministry spokesman Yao Jian said, “With the changing of the international structure, especially the emergence of the G20 after the financial crisis, it is necessary for international economic reform to involve multiple countries.” Pink papers like Financial Times, The Wall Street Journal and the Economist have also commented favourably about this development and not dismissed it as an internal staff matter of the IMF. IMF is known to have revolving door relations with developing countries, especially Latin America and, to some extent, India, when Fund economists move over as senior officials and the same worthies revert to the IMF when ‘pro-reform’ governments fall. This is not one such. Financial Times described him as a “respected figure in international financial circles.” The WSJ quoted Prof. Eswar Prasad, now with Brookings Institution and former China Chief in the IMF, who expects how “Mr. Zhu can be quietly but firmly assertive in pushing for the institution to be more sensitive to Asian (read, “Chinese”) perspective. Dr. Zhu Min who is now serving as the Deputy Governor of the People’s Bank of China (China’s central bank) is to take over on 3 May 2010. Dr. Min is currently responsible for international affairs in the PBoC. In a statement issued on 24th February, IMF Managing Director Dominique Strauss Kahn said, Zhu will “play an important role in working with me and my management team in meeting the challenges facing our global membership in the period ahead, and in strengthening the fund’s understanding of Asia and emerging markets more generally.” The Wall Street Journal (February 24, 2010) put a spin on the special role of Zhu in “strengthening the Fund’s understanding of Asia” and said, it “is the polite way the IMF talks about its inability to get hardly any Asian countries to turn to the IMF for help during the current economic turmoil.” As the Journal went on to add, there is an odd chance, Europe willing (?), he might succeed Strauss Kahn whose retirement is on the cards. There have been several reactions to his appointment and rumours are rife about the role he could play. Indeed, there were indications in the past few months that Zhu would be appointed to a senior–level post in the IMF. Before we proceed, we need to know who this Zhu is as also the significance attached to his appointment. Zhu holds a doctorate in Economics from Johns Hopkins University, USA. He served as an economist with the World Bank from 1991 to 1996. He was also with the UNDP for some time. On return to China, he served as a Vice President of the Bank of China for many years. In October last, the Communist Party of China approved his appointment as Vice Governor of the PBoC. The PBoC was referring to these credentials when it issued the statement quoted earlier. Even around the time when he was elevated to the PBoC, China hoped that Zhu would compete for the post of Deputy Managing Director of the IMF. China’s move to shift him to its central bank was indeed a shrewd move to groom him for the IMF post. It may be interpreted as one of the steps in China’s strategy “to seek more influence at the IMF, after the global financial crisis spawned debate about the reform of the international monetary system.” (WSJ, October 17, 2009.) It is not therefore surprising that IMF could notify, “Zhu Min brings a wealth of experience in government and financial sector.” There is evidence that Zhu Min handled the crisis and, later, the stimulus programs along with Governor, Dr. Zhou Xiachuan, and his team. Many analysts attach special significance to this appointment and see a growing role for China in the IMF and the World Bank. Two years ago, China was able to send Dr. Justin Lin Yifu as the Chief economist of the World Bank. I had dealt with this appointment and its significance in an article. (Chief Economist of World Bank- The man for the job, Business Line, 05/03/2008: URL http://www.thehindubusinessline .com/2008/03/05/stories/2008030550410900.htm) At that time also China felt proud and Dr. Lin said, “By picking a candidate from China, the World Bank will be able to better serve developing countries.” Dr. Lin’s role in the Bank clearly testifies that he plays an independent role as the Chief Economist and is not cluttered by the group-think that invades the policymakers in the Washington Twins. His statements on the China’s exchange rate policy, continuance of stimulus programs, etc bear this out. The IMF is at the crossroads and IMF-China relations seem to have hit the highpoint on several fronts. The Fund was losing its relevance even as indebted countries were reluctant to accept its conditionalities imposed under adjustment programs or what is described as the Washington Consensus (WC). Even as the WC was getting discredited, many developing countries were attracted to what has been latterly described as Beijing Consensus. China’s high rates of growth over two decades have indeed inspired many emerging economies to adopt the model. The high rates of growth of some other emerging e3conomies like India, Brazil, Russia, etc with burgeoning exchange reserves have tended to tilt the economic balance in favour of emerging economies. Sadly for the developed countries, especially the U.S., the deep recession caused by the financial crisis of 2007 has called into question many of the earlier theories, models and strategies. China, a rising economic power, has not failed to seize the opportunities. It has its quarrels with the IMF on several fronts. It has called into question the legitimacy of the IMF and its role in the world without a radical change in its ownership. China has been fighting for higher quota for developing countries and makes it a condition for any additional funding of the IMF. It has fought for quota revision and has been able to bring about success in an incremental way. For the present, emerging economies would get only 5 percent and further revision of quota has been advanced. China has been attacking the role of U.S. dollar as a reserve currency and has been make serious efforts to replace it with some other currency. One way it works to achieve this goal is to replace it with the Fund’s special drawing rights (SDRs). It also wants to change the basket for the SDR and to include its currency, Yuan. While aiming at all these, it is cautious and is aware of the limitations. The replacement of G7 with G20 which now includes some emerging economies provides a forum for negotiating these issues. China was hoping to negotiate issues like bank regulation through this forum. There is evidence that China is not happy over the progress made in G20 so far. The IMF has been waging a war with Beijing over the exchange rate for Yuan. The war in fact was started by the U.S. way back in 2002. Initially, the U.S. tried to bring pressure through its diplomatic channels and, later, through G7. It made serious efforts to set the IMF on China over this issue. It led to a cold war between them. I have dealt with this issue in a detailed article published in the Economic and Political Weekly. (The burial of a Controversy: The IMF, the US ands the Renminbi, September 5, 2009, Vol. XIV No.36). The IMF decided to bury the issue and explained it was not practicable to label currencies as “fundamentally misaligned.” The IMF could not win the theoretical battle with China. On the part of the U.S., with the fiercest recession ever rearing its head, it needed the support of China in handling the crisis related issues. Nearly 60 percent of China’s reserves are held in US denominated assets; U.S. needs China’s continued investment to maintain its stimulus, etc programs. U.S. needs China as much, if not more, as China needs U.S. Unfortunately, in recent weeks the issue is being raised again both by the US and the EU. The IMF will continue to be forum ultimately for deciding these issues. In the recent Davos conclave, Zhu represented China and was pitted against senior economists and politicians. On all the issues Zhu could put forward China’s concerns and also defend its strategies with aplomb. He would do so within the IMF. It is good for China and for the world to have a Chinaman in the IMF.

(The writer Mr K.Subramanian, is formerly Joint Secretary in the Ministry of Finance,Government of India. He is now associated with Chennai Centre for China Studies.Email:subrabhama@gmail.com)

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