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Adding the Chinese currency, the Renminbi, to the Special Drawing Rights Basket (SDR) of the International Monetary Fund (IMF) in 2016 marks only the latest effort of the international financial institution to include its most underrepresented member state, China.[1] Despite the clear endeavor to give China greater power and influence in global economic governance, the country’s future in the Fund remains uncertain. The disharmonies between China and the IMF can only be understood by retracing their relationship, requiring profound and sustainable reform policies within the Fund in response to Chinese pressure. Otherwise, the IMF could not only lose efficiency in the event of a crisis, but also suffer a loss of global legitimacy.

The policy response of the Fund’s leadership to China’s continued underrepresentation in the IMF is both exemplary and special. Exemplary because it illustrates the permanent conflict between the structure of the global economy – still dominated by the post-World War II Bretton-Woods architecture – and because it leaves each developing state fearing that its economic capacities are jeopardized by the system’s current hierarchy. At the same time, the enormous speed at which the Chinese economy developed in the last decades makes the case special, posing an unprecedented challenge to the IMF to adapt to the emerging power.[2] Consequently, the relationship between China and the IMF has been anything but steady and was heavily influenced by each entity’s own struggles in combination with historically grown structures.

The IMF, as the most powerful international financial institution (IFI) emerging from the Bretton Woods system, currently faces a legitimacy crisis due to its slow adaptation to a heavily shifting world economy.[3] Besides ever-present criticism on its responsibilities and tools – for instance surveillance and the conditionality of lending – as well as its role during debt crises, the BRIC economies (Brazil, Russia, India, and China) started to increase pressure on the Fund against the imbalanced voting rights and quotas, which heavily favor Western states.[4] The IMF tried to address this injustice with the 2010 reform to realign the quotas away from overrepresented and developed countries toward underrepresented, emerging states.

The major profiteer of this reform was undoubtedly China. In the context of the Renminbi’s inclusion in the SDR Basket, the recent reforms can be interpreted as the Fund’s attempt to react to China’s continued discontent with the IFI’s current structure. The IMF’s intention to integrate China in its organizational structure for the foreseeable future is evident, yet not uncontroversial. Several economists particularly criticized the Fund for including the Renminbi in the SDR Basket, since it was considered as more of a political than a technical decision.[5] China maintained several capital controls which clash with the eligibility criteria for SDR inclusion.[6] The fact that the IMF moved forward despite this open contradiction with its norms, underlines the Fund’s willingness to compromise for closer cooperation with China.

The Chinese regime, on the other hand, has been behaving more ambiguously regarding its future within the IMF, trying to challenge the institutional power by creating alternative competing financial institutions.

Formally, Chinese leaders have clearly acknowledged the functionality of the Fund and its international legitimacy. The country has constantly increased its influence within the Fund, measured not only by its voting power but also by its financial contributions and representation, i.e. the number of Chinese employees within the organization.[7] The Chinese desire to play a bigger role within the IMF implicitly reaffirms the institution’s legitimacy, going hand in hand with the convergence of Chinese economic policy with the Fund’s international standards.

While China formally seems to have embraced the IMF, the country also took a leading role in establishing alternative IFIs such as the BRICS Contingency Fund, or more recently, the Asian Infrastructure Investment bank (AIIB). Some states, mainly the US, argue that China utilizes these institutions for its own political and economic agenda, undermining the IMF’s international predominance. However, others suggest that the country may grow into a more responsible role as an emerging global economic leader.[8]

Besides the creation of the AIIB, another controversy continues to taint Chinese relations with the Fund. It evolved around the exchange rate of the Yuan, which the Chinese economic leadership has been accused of manipulating to boost its export economy. A report of the IMF indicated that the Renminbi may be undervalued and that China’s reserve accumulation may be significantly above a reasonable level.[9] The Chinese government however, rejected the idea of intentional undervaluation of its currency and even blocked the publication of the Fund’s consultations between 2007 and 2009.[10][11]

In sum, the IMF is clearly pursuing China to integrate itself more into the Fund’s structure by introducing reforms in favor of the country’s influence, whilst the Chinese regime has adopted more controversial behavior. The country formally embraced the Fund’s reforms and adapted to many of its norms. The inclusion of the Chinese currency and Beijing’s growing influence within the Fund are consistent with the official statements of the regime and point towards a common future. However, the creation of alternative Chinese-led IFIs, the reluctance of the exchange-rate conflict to resolve itself, and the different paces of institutional reform and economic reality also raise substantial doubts for a harmonious future.

Looking forward, the uncertain relations between the IMF and China might impose important threats. Such an imbalance can be dangerous. China has become a major backbone of the world economy and can maintain, but also disturb, its stability. China’s stock market crash in 2015 showed the domino effect it has on global financial systems.[12] Therefore, it is crucial that the world’s second largest economy be able to coordinate with the leading international financial institution in times of economic crisis. This requires a relatively harmonious relationship between the two.

However, the IMF still does not fully reflect the economic importance of China. The voting rights as well as its overall structure recognize neither the current economic reality nor future global economic governance, in which there is no way around China’s economy and the regional institutions which the country dominates. It is necessary that the IMF adopt policies to integrate competing and autonomous institutions ensuring stability in the globalized financial system. It should initiate additional reforms of the voting distribution to prevent further Chinese resentment over inappropriate representation. At the same time, it should sharpen its tone to address the Chinese manipulations of their currency. The IMF could point out the potential of the Renminbi to become an attractive safe-haven currency, if it gets rid of governmental constraints. Only then, will the IMF maintain its crucial role as a legitimate guardian of the highly interdependent world economy.

References

[1] Peter Ferdinand and Jue Wang, “China and the IMF: from mimicry towards pragmatic international institutional pluralism” International Affairs 89, no. 4 (2013): 914.

[2] World Bank, Data, Annual GDP growth in % February 11, 2016,

http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=CN

[3] Yago, Kazuhiko, Yoshio Asai, and Masanao Itoh. History of the IMF. Elektronische Daten. Organization, Policy, and Market, Tokyo Springer Japan 2015.

[4] Barry Eichengreen and Ngaire Woods, “The IMF’s Unmet Challenges.” Journal Of Economic Perspectives 30, no. 1 (2016): 29-52.

[5] Agatha Kratz, François Godement and Jérôme Doyon, “China, the Yuan and the IMF: double or quits?”, World Affairs Online, 2016.

[6] Elliott Hentov and George Hoguet, “After RMB inclusion in the SDR: Why does China want the RMB to be a reserve currency?”, State Street Global Advisors, February 26, 2015, https://www.ssga.com/investment-topics/general-investing/2015/After-RMB-inclusion-in-the-sdr.pdf

[7] Sandra Heep, “China in global finance. Domestic financial repression and international financial power.”, Cham Springer 2014.

[8] Françoise Nicolas, “China and the global economic order: A discreet yet undeniable contestation.” China Perspectives, no. 2 (June 1, 2016): 7-14.

[9] Ferdinand and Wang, China and the IMF, 902.

[10] Ibid., 903.

[11] Nicolas, “China and the global economic order”, 8.

[12] The Economist, “Market turmoil. The causes and consequences of China’s market crash.” August 24, 2015. http://www.economist.com/news/business-and-finance/21662092-china-sneezing-rest-world-rightly-nervous-causes-and-consequences-chinas