Written by Laurence Brahm - Published by South China Morning Post on 07/14/2009
On June 16, when Brazil, Russia, India and China (known by the acronym Bric) met in Yekaterinburg, Russia, to discuss alternatives to the US dollar as the world reserve currency, a greater vision was looming – the restructuring of our global financial system.
In some respects, this meeting may be as significant in terms of transforming relations between the developed and
underdeveloped world as the Bandung conference of 1965. Political rhetoric about colonial-imperialism has been put aside. The Bric nations are changing global finance, post-Bretton Woods, by becoming the IMF’s creditors rather than its debtors.
That, however, requires a more complicated financial restructuring than can be accomplished in one meeting. For a
start, IMF rules require waiting another four years before the institution can undergo the very same “structural adjustment” it has preached to developing countries. Effectively, IMF rules also prevent Bric nations from having a greater say at the board level, at least during this global financial crisis.
But, as China knows better than everyone else, there is always a way around bureaucratic rules. If you cannot become a shareholder, then be a creditor. The IMF’s coffers are empty. So when the IMF decided to issue US$150 billion in SDR bonds, the Bric nations bought in, with Russia and Brazil purchasing US$10 billion worth each, and China taking the lion’s share of US$50 billion. If China cannot be the IMF’s biggest shareholder, it is
determined to become its biggest creditor. Beijing has reasons for wanting to gain leverage. The IMF has continuously insisted that China adjust its currency upwards. In a recent report, it openly accused China of undervaluing its currency and called for the yuan to be revalued. This is precisely what China refuses to do, and Beijing is quite irritated.
Chinese economists are extremely confident, believing this crisis gives China space for further financial
reform. The international system needs reforming and the global economic power structure requires restructuring. Within this context, the yuan will rise and become the international currency – at least that is what many in Beijing think.
Others are more sceptical and feel that the US dollar cannot be replaced, in the short term at least, as the global reserve currency. It appears that some division of opinion has arisen in Beijing, with central banker Zhou Xiaochuan writing a series of articles advocating the “supra-national reserve currency” approach, while others warn that promoting such an idea is detrimental to China’s diplomatic relations with the US. This is one of the rare moments when Beijing’s complex and secretive internal policy debates have become visible outside its inner circles.
But there is one thing they do agree upon: SDRs should one day replace the US dollar as the global reserve currency. Certainly, nobody in the top leadership wants to dislocate relations with Washington, even if the Bric nations are vitriolic in condemning the Washington Consensus approach to development.
China’s purchase of IMF bonds represents a shift by openly reducing US dollar assets. Bric nation’s effective underwriting of the most recent SDR bond issue is unmistakably intended to be a clear step towards creating a global reserve currency. By participating, China has become a creditor of the IMF, giving Beijing more say over this monument of an institution.
The Bretton Woods agreement established the IMF as the lender of last resort to the world. It looks like China’s position is clear – to become the lender of last resort to the IMF.
Laurence Brahm is a global activist, international mediator, political columnist and author. He is the leading advocate of a fresh development paradigm - The Himalayan Consensus - an innovative approach to development.
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