China should convince all nations that its policies are transparent and fair to gain credibility as a manager of the global financial system
The directors of the International Monetary Fund and the World Bank return to Tokyo this week for their annual meetings after a gap of 48 years. It’s a different Japan. The ageing of the host nation, the rise of China, the “shift” of the epicentre of global growth to mainland Asia, in more ways than one, have subdued what was in 1964 —when the Fund and Bank last met here — the “land of the rising Yen”. The “shocks” administered to the global economy by the recent trans-Atlantic financial crisis have further accelerated these “shifts”, and the Yuan now rises where the Yen once shined.
First ‘Asian-origin’ president
While the Bank arrives in Tokyo with a South Korea-born American as its first ‘Asian-origin’ president, the Fund arrives with its first Chinese deputy managing director, who got the job as part of a deal with the European Union. This would rub even more salt into the wounded pride of a Japan that tried hard for long to get one of the top jobs and repeatedly failed because the West would not accommodate Asia till China stared it in its face.
Not surprisingly, therefore, while much of Asia celebrates the eastward power shift, Tokyo remains more cautious and concerned. This came through explicitly in a paper that Japan’s former Defence Minister and now chairperson of the national executive of the opposition Liberal Democratic Party, Yuriko Koike, wrote for a conference last week on the theme “The Currencies of Power and the Power of Currencies”, organised by the Geo-economics and Strategy Programme of the International Institute for Strategic Studies.
“China is currently deepening its commitment to the global financial system” observed Ms Koike, “By gaining experience as a responsible stakeholder, China should be expected to play an important role in working for global financial stability. But that is a test that has yet to be held.”
Many at the conference agreed with Ms Koike that the jury is out on China’s credibility as a manager of the global financial system, but few shared the recent concern expressed by Brazil’s Finance Minister Guido Mantega that the global economy was being destabilised by “currency wars” between China and the United States. Two years ago, the former managing director of the IMF Dominique Straus-Kahn gave public expression to Mr. Mantega’s worries at the Fund-Bank meetings in Washington DC. These worries have been revived by the third round of liberal monetary policy, dubbed quantitative easing (QE3), launched by the U.S.
Participants at last week’s IISS-GES conference seemed less worried than Mr. Mantega or the man who has since articulated this view in an international bestseller (Currency Wars: The making of the next global crisis, 2011), James Rickards (USA) who was challenged at the IISS conference by John Williamson (U.K.), Surjit Bhalla (India) and Zha Xiaogang (China), who in turn argued that ‘currency wars’ may be a thing of the past, with China entering a new phase of domestic demand led growth that would ensure sustained appreciation of the renminbi (RMB).
Mr. Williamson, former chief economist of the World Bank to whom we owe the phrase “Washington Consensus,” questioned the Brazilian view that QE3 was a ‘beggar-my-neighbour’ initiative aimed at devaluing the U.S. dollar. Rather, he saw it as an effort to boost domestic consumption and global growth. Mr. Bhalla, who has just published a persuasive account of how currency under-valuation provides an impetus to growth, Devaluing to Prosperity: Misaligned Currencies and Their Growth Consequences (2012) asserted that China had in fact “won the currency war of the past two decades and has now declared currency peace” with a focus on domestic economic growth.
Seeming to go along with these views, Mr. Zha, from the Shanghai Institutes for International Studies, underscored China’s role as an “importing” power and a source of foreign direct investment. Mr. Zha was most direct in linking the RMB’s future role to Asian geo-politics, curiously echoing Ms Koike’s concerns. “The internationalisation of the renminbi, especially in East Asia, will strengthen China’s economic links with its neighbours” Mr. Zha believes, “and its influence on regional economic and financial cooperation (intra-regional trade, Asian regional capital markets, crisis prevention and management), which is critical for stability in China’s backyard.” (sic)
Therefore, while the Fund’s directors are unlikely to worry about ‘currency wars’ at their meetings in Tokyo, and Christine Lagarde can be expected to be more ‘diplomatique’ in dealing with the issue than her boisterous predecessor, the growing weight of China in the global economy, and certainly in its ‘backyard’, as well as in the management of the Bretton Woods sisters will be on top of the mind of this year’s hosts of the annual meetings, and many other Asian economies.
The IMF is duty bound by the provisions of its Articles of Agreement to insist that each member “undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates” and that they all “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members”.
In the past, the Fund has failed to avert ‘currency wars’ and it remains to be seen whether it will succeed in the months ahead. Ensuring exchange rate stability and discouraging beggar-my-neighbour policies is vital to the stability of global markets as well as to the revival of global growth. It is the Fund that must grapple with this challenge rather than allow some recent attempts to take this matter to the World Trade Organisation to succeed. Stable exchange rates are no doubt a trade facilitator but they are not a matter for trade negotiations. They are the pillars of a stable global economy.
For China to seek a larger role in the management of the global economy it must win the confidence of all, especially Asia, in its policies being transparent and fair. Equally, the U.S. and Europe have to regain their lost credibility for their management of macro-economic policies.
(Sanjaya Baru is director for geo-economics and strategy, International Institute for Strategic Studies and Hon. Senior Fellow, Centre for Policy Research, New Delhi)