Two recent reforms in the IMF indicate how the Brettonwoods System resists and later accommodates the interest of new power house like China.
First, the IMF has included Chinese Yuan as an international currency in its SDR basket.
Second, the US Congress finally approved the delayed 2010 quota reforms that make China the third largest quota holder in the world with 6.394 % voting power. Both steps have given China an unexpected but deserving weight in the affairs of the international financial system.
On the currency front, Beijing advocated that the Dollar regime is vulnerable and is ‘injustice’. So in the last two decades, China was complaining, pressurizing and using its international engagements to popularize Yuan.
China has actively used available platforms like the BRICS to popularize Yuan denominated trade settlement. The result was astonishing. Data by currency trade platforms indicate that Yuan is the second most used currency after Dollar in global trade.
But Yuan’s relevance in financial business is not significant to give the global currency status. The currency is not enough convertible for capital account purposes. Even the renminbi denominated dim sum bond is an emerging market economy level reform.
Another weakness is that China has a managed floating exchange rate set up that gives scope for government control in currency management.
In this context, many observers believe that Beijing got some favourable treatment from the IMF while reviewing and incorporating Yuan in the SDR basket.
On the other hand, more countries were involved pressurizing for IMF quota reforms. Developing countries especially India campaigned against the US Congresses’ veto on the implementation of the fourteenth quota reforms that shifts 6% of voting power away from the European countries to the emerging market economies.
China has got additional 2.4% of IMF votes after the revision; thus became the largest gainer. Its voting share is just shorter that of Japan. Collective gain to the EMEs has made China, India, Russia and Brazil among the top ten quota holders of the Fund.
The restructured IMF looks a more balanced entity though future restructuring should continue to increase Chinese stockholding. Japan and China together holds nealrlu13% of the votes indicating that Asia is rising.
The IMF reforms may reduce the attraction of the recently created alternative institutions – the AIIB and the NDB. But both have created their own impact as finally the US was compelled to make the BWS system sufficiently flexible to insert new heavy weight.
China is not hiding its happiness and they elaborate that the increased voting share is a clear indication of the rising Chinese role “…ratification of the reform illustrates that China’s new status in the international financial system has also been recognized, and that China will be allowed to play a bigger role in international financial governance.”- says Song Gouyou in a Global Times article.
But the new developments add more responsibilities to China. It has to undertake more reforms in the capital account convertibility front to facilitate the reserve currency related activities of other countries. Looking back, the US has taken considerable pain to support the BWS during its high time. But other country who possesses reserve currencies doesn’t offer much. That is why the world still respects the Dollar.
“For China, the implementation of the 2010 IMF reforms not only serves as a fresh start to receive the financial rights in the international community that it deserves; it’s also a fresh start for the nation in terms of the need to practice its international financial responsibilities.” Acknowledge Gouyou.
International reserve currency status is not just a honour, but also a responsibility. The acceptability of Yuan and its rating vis a vis Dollar depends upon how China is able to fulfill its responsibility to the rest of the world as a global financial power through further reforms. For that it has to undertake some drastic measures including the way in which it manages the economy.