China and the International Monetary Fund

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In 1945, China cofounded the International Monetary Fund (IMF) with 34 other nations. China was initially represented by the Republic of China. [1] In April 1980, representation transferred to the People's Republic of China. The Chinese-IMF relationship mainly operates around affairs associated with IMF governance and the IMF Special Drawing Rights (SDR). [2] [3]

Contents

China and IMF governance

China has been trying to expand its political and decision-making power within the IMF. The IMF's voting system weights each country's vote based on the amount of that country's monetary contribution to the Fund. China has been trying to raise its quota. In May 1980, the Chinese government appealed to adjust its IMF quota. With approval from the IMF board, the quota of China was increased from 1.2 billion SDRs to 1.8 billion SDRs. China also obtained a single-country seat on the IMF executive board, which expanded the number of IMF directors to 22 members. As of 2017 the quota of China in the IMF was 30.5 billion SDRs, giving it 6.09% of the total vote. [4]

To further rebalance power in the IMF, China appealed for changes that would transfer voting power to developing economies. [5] In 2010, the Chinese executive director of the Fund, Zhou Xiaochuan, addressed the board and asserted that giving more power to the emerging economies was critical for the group's legitimacy, accountability and long-term health. [6]

China cooperated with other developing countries to advance its rebalancing project. China cooperated with the BRICS, a coalition of the nations of Brazil, Russia, India, China and South Africa. With a larger combined voting share and voice, the BRICS has been more effective at renegotiating IMF governance. [4]

China and Article IV Obligations

China as a current member of the IMF, is bounded by the Articles of Agreement of the International Monetary Fund. [7] [8] However, whether China has fulfilled its obligations defined in Article IV of the International Monetary Fund with its exchange policies and arrangements remains debated. One common accusation is that Beijing manipulates the value of its currency, making the Renminbi undervalued, to gain unfair advantages in international trade. [8] [9] [10] [11] [12] China denies such accusations and stresses its full conformity with the Article of the IMF. [13] Some also find it challenging to prove Beijing policies' misalignment against the Article since intent has to be demonstrated as part of the requirement. [8] [12]

Relevance to the IMF

While some scholars also analyze the topic under the framework of the WTO and the GATT, it is commonly accepted that the IMF possesses the authority to determine foreign exchange matters. Article XV of the GATT affirmed:

"In all cases in which the CONTRACTING PARTIES are called upon to consider or deal with problems concerning monetary reserves, balances of payments or foreign exchange arrangements, they shall consult fully with the International Monetary Fund. In such consultations, the CONTRACTING PARTIES shall accept the determination of the Fund as to whether action by a contracting party in exchange matters is in accordance with the Articles of Agreement of the International Monetary Fund, or with the terms of a special exchange agreement between that contracting party and the CONTRACTING PARTIES." [14]

The Agreement Between the International Monetary Fund and the World Trade Organization also states that:

"The Fund shall inform in writing the relevant WTO body (including dispute settlement panels) considering exchange measures within the Fund's jurisdiction whether such measures are consistent with the Articles of Agreement of the Fund." [15]

Therefore, should the IMF decide that China follows the Articles, the WTO, including its dispute settlement bodies, will not be open to challenges on the issue. [12]

US Accusation During the Trump Administration

On August 5, 2019, the U.S. Department of the Treasury designated China as a currency manipulator in a press release. The determination was made by the then-Secretary Mnuchin under the auspices of then-President Donald Trump. The press release also claimed that Mnuchin shall "engage with the International Monetary Fund to eliminate the unfair competitive advantage created by China's latest actions." [16] On August 6, 2019, the People's Bank of China issued a statement, refuting the U.S. Treasury's designation of China as a currency manipulator, claiming that Renminbi's depreciation was the result of "shifts in market dynamics and volatilities in global foreign exchange markets amid global economic developments and escalating trade frictions." [17]

On August 9, 2019, the IMF issued the 2019 Article IV Consultation for the PRC, in which it determined that the value of Renminbi in 2018 was "broadly in line with fundamentals and desirable policies," therefore essentially disputed the accusation raised by the U.S. during the trade conflict against China. [18] [19] James Daniel, the IMF's mission chief for China, also commented that Renminbi in 2018 was not significantly over-or undervalued. [19]

On January 13, 2020, the U.S. Department of the Treasury removed China from the list of currency manipulator, on the eve of reaching a mutual trade deal. [20] [21] [22]

China and IMF SDR

On October 1, 2016, the Chinese Yuan officially joined the SDR basket and became a foreign exchange reserve currency of the IMF, along with U.S. Dollar, British Pound, Euro and Japanese Yen. [23]

The IMF conducts a quarterly survey called COFER, or the Currency Composition of Official Foreign Exchange Reserves. This survey collects information on member states’ foreign exchange reserves. With the recent inclusion of the Chinese Yuan, the currency varieties in the 4th quarter of 2016 COFER report includes the U.S. Dollar, the Euro, the Japanese Yen, the British Pound, the Swiss Franc, the Australian Dollar, the Canadian Dollar, and the Chinese Yuan. For the five SDR reserved currencies, their respective global foreign exchange reserve sums were as follows:

The currency composition of the SDR basket is reviewed every five years. The current weights for the component currencies are as follows:

The current value of SDR is determined by these five SDR reserved currencies and equals the sum of the following currency values:

Related Research Articles

<span class="mw-page-title-main">International Monetary Fund</span> International financial institution

The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world." Formed in 1944, started on 27 December 1945, at the Bretton Woods Conference primarily by the ideas of Harry Dexter White and John Maynard Keynes, it came into formal existence in 1945 with 29 member countries and the goal of reconstructing the international monetary system. It now plays a central role in the management of balance of payments difficulties and international financial crises. Countries contribute funds to a pool through a quota system from which countries experiencing balance of payments problems can borrow money. As of 2016, the fund had XDR 477 billion. The IMF is regarded as the global lender of last resort.

Special drawing rights are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). SDRs are units of account for the IMF, and not a currency per se. They represent a claim to currency held by IMF member countries for which they may be exchanged. SDRs were created in 1969 to supplement a shortfall of preferred foreign exchange reserve assets, namely gold and U.S. dollars. The ISO 4217 currency code for special drawing rights is XDR and the numeric code is 960.

<span class="mw-page-title-main">Japanese yen</span> Official currency of Japan

The yen is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar (US$) and the euro. It is also widely used as a third reserve currency after the US dollar and the euro.

<span class="mw-page-title-main">Renminbi</span> Official currency of the Peoples Republic of China

The renminbi is the official currency of the People's Republic of China. It is the 5th most traded currency as of April 2022.

<span class="mw-page-title-main">Reserve currency</span> Currencies held by monetary authorities as part of their foreign exchange reserves

A reserve currency is a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves. The reserve currency can be used in international transactions, international investments and all aspects of the global economy. It is often considered a hard currency or safe-haven currency.

The Hong Kong dollar is the official currency of the Hong Kong Special Administrative Region. It is subdivided into 100 cents or 1000 mils. The Hong Kong Monetary Authority is the monetary authority of Hong Kong and the Hong Kong dollar.

<span class="mw-page-title-main">Balance of payments</span> Difference between the inflow and outflow of money to a country at a given time

In international economics, the balance of payments of a country is the difference between all money flowing into the country in a particular period of time and the outflow of money to the rest of the world. These financial transactions are made by individuals, firms and government bodies to compare receipts and payments arising out of trade of goods and services.

<span class="mw-page-title-main">Bretton Woods system</span> Financial-economic agreement reached in 1944

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states. The Bretton Woods system required countries to guarantee convertibility of their currencies into U.S. dollars to within 1% of fixed parity rates, with the dollar convertible to gold bullion for foreign governments and central banks at US$35 per troy ounce of fine gold. It also envisioned greater cooperation among countries in order to prevent future competitive devaluations, and thus established the International Monetary Fund (IMF) to monitor exchange rates and lend reserve currencies to nations with balance of payments deficits.

The Exchange Stabilization Fund (ESF) is an emergency reserve fund of the United States Treasury Department, normally used for foreign exchange intervention. This arrangement allows the US government to influence currency exchange rates without directly affecting domestic money supply.

<span class="mw-page-title-main">Currency intervention</span> Monetary policy operation

Currency intervention, also known as foreign exchange market intervention or currency manipulation, is a monetary policy operation. It occurs when a government or central bank buys or sells foreign currency in exchange for its own domestic currency, generally with the intention of influencing the exchange rate and trade policy.

<span class="mw-page-title-main">Renminbi currency value</span> Value of the currency of China

Renminbi currency value is a debate affecting the Chinese currency unit, the renminbi. The renminbi is classified as a fixed exchange rate currency "with reference to a basket of currencies", which has drawn attention from nations which have freely floated currency and has become a source of trade friction with Western nations.

<span class="mw-page-title-main">International use of the U.S. dollar</span> Use of US dollars around the world

The United States dollar was established as the world's foremost reserve currency by the Bretton Woods Agreement of 1944. It claimed this status from sterling after the devastation of two world wars and the massive spending of the United Kingdom's gold reserves. Despite all links to gold being severed in 1971, the dollar continues to be the world's foremost reserve currency. Furthermore, the Bretton Woods Agreement also set up the global post-war monetary system by setting up rules, institutions and procedures for conducting international trade and accessing the global capital markets using the US dollar.

Since the late-2000s, the People's Republic of China (PRC) has sought to internationalize its official currency, the Renminbi (RMB). RMB internationalization accelerated in 2009 when China established the dim sum bond market and expanded Cross-Border Trade RMB Settlement Pilot Project, which helps establish pools of offshore RMB liquidity. The RMB was the 8th-most-traded currency in the world in 2013 and the 7th-most-traded in early 2014. By the end of 2014, RMB ranked 5th as the most traded currency, according to SWIFT's report, at 2.2% of SWIFT payment behind JPY (2.7%), GBP (7.9%), EUR (28.3%) and USD (44.6%). In February 2015, RMB became the second most used currency for trade and services, and reached the ninth position in forex trading. The RMB Qualified Foreign Institutional Investor (RQFII) quotas were also extended to five other countries — the UK, Singapore, France, Korea, Germany, and Canada, each with the quotas of ¥80 billion except Canada and Singapore (¥50bn). Previously, only Hong Kong was allowed, with a ¥270 billion quota.

India has large foreign-exchange reserves; holdings of cash, bank deposits, bonds, and other financial assets denominated in currencies other than India's national currency, the Indian rupee. The reserves are managed by the Reserve Bank of India for the Indian government and the main component is foreign currency assets.

The United States was a founding member of the International Monetary Fund (IMF), having hosted the other countries at the IMF’s founding conference, the Bretton Woods Conference, in 1944. In addition, under the Bretton Woods system, other countries’ currencies were kept at a fixed exchange rate to the U.S. dollar, which in turn was pegged to the value of gold.

References

  1. ↑ Boughton, James M. (2001). "19 Toward Universal Membership" (PDF). Silent Revolution: The International Monetary Fund 1979–1989. International Monetary Fund. p. 964.
  2. ↑ "At a Glance - China and the IMF". www.imf.org. Retrieved 2017-06-06.
  3. ↑ Helleiner, Eric; Kirshner, Jonathan, eds. (2014). The Great Wall of Money: Power and Politics in China's International Monetary Relations (1 ed.). Cornell University Press. ISBN   9780801453090. JSTOR   10.7591/j.ctt1287chj.
  4. 1 2 Momani, Bessma (2016). Enter the Dragon: China in the International Financial System. McGill-Queen's Press. pp. 267–288.
  5. ↑ "IMF Members' Quotas and Voting Power, and IMF Board of Governors". www.imf.org. Retrieved 2017-06-06.
  6. ↑ "Statement by the Hon. Zhou Xiaochuan, Governor of the Fund for the People's Republic of China" (PDF).
  7. ↑ "Articles of Agreement of the International Monetary Fund". www.imf.org. Retrieved 2022-07-24.
  8. 1 2 3 Oliel, Michelle (2011). Undervalued and manipulated?: evaluating China's foreign exchange arrangements under the International Monetary Fund and the World Trade Organization. Nijmegen, The Netherlands: Wolf Legal Publishers. ISBN   978-90-5850-633-7. OCLC   711519413.
  9. ↑ Michael R. Myers (2018). "The Globalization of United States Debt: The Real Impact of China's Rise as a Creditor State". Indiana Journal of Global Legal Studies. 25 (1): 495. doi:10.2979/indjglolegstu.25.1.0495. ISSN   1080-0727. S2CID   158835960.
  10. ↑ "Treasury Designates China as a Currency Manipulator". U.S. Department of the Treasury. Retrieved 2022-07-24.
  11. ↑ "Manipulation of Exchange Rates in International Law: The Chinese Yuan | ASIL". www.asil.org. Retrieved 2022-07-24.
  12. 1 2 3 Pettis, Elizabeth L. (2011). "Is China's Manipulation of Its Currency an Actionable Violation of the IMF and/or the WTO Agreements?". Journal of International Business and Law. 10 (2): 281–296.
  13. ↑ "Statement of the People's Bank of China on US Treasury Department Designating China as a Currency Manipulator_News Release_State Administration of Foreign Exchange". www.safe.gov.cn. Retrieved 2022-07-23.
  14. ↑ "WTO | legal texts - Marrakesh Agreement". www.wto.org. Retrieved 2022-07-24.
  15. ↑ "D. Agreement Between the International Monetary Fund and the World Trade Organization 11381-(96/105)(D)". IMF. Retrieved 2022-07-24.
  16. ↑ "Treasury Designates China as a Currency Manipulator". U.S. Department of the Treasury. Retrieved 2022-07-24.
  17. ↑ "Statement of the People's Bank of China on US Treasury Department Designating China as a Currency Manipulator_News Release_State Administration of Foreign Exchange". www.safe.gov.cn. Retrieved 2022-07-23.
  18. ↑ Department., International Monetary Fund. Asia and Pacific (2019). People's Republic of China : 2019 Article IV Consultation-Press Release ; Staff Report ; Staff Statement and Statement by the Executive Director for China. International Monetary Fund. ISBN   978-1-5135-1063-7. OCLC   1121315391.
  19. 1 2 Palmer, Doug. "New IMF report doesn't back Trump's currency manipulation charge against China". POLITICO. Retrieved 2022-07-24.
  20. ↑ Rappeport, Alan (2020-01-13). "U.S. Says China Is No Longer a Currency Manipulator". The New York Times. ISSN   0362-4331 . Retrieved 2022-07-24.
  21. ↑ Franck, Thomas (2020-01-13). "US removes China from currency manipulator list ahead of trade deal signing". CNBC. Retrieved 2022-07-24.
  22. ↑ "US reverses China 'currency manipulator' label". BBC News. 2020-01-14. Retrieved 2022-07-24.
  23. ↑ "Special Drawing Right SDR". www.imf.org. Retrieved 2017-06-07.
  24. ↑ "Chinese Renminbi to be Identified in the IMF's Currency Composition of Foreign Exchange Reserves". www.imf.org. Retrieved 2017-06-08.
  25. ↑ "Special Drawing Right SDR". www.imf.org. Retrieved 2017-06-08.
  26. ↑ "Press Release: IMF Executive Board Completes the 2015 Review of SDR Valuation". www.imf.org. Retrieved 2017-06-08.
  27. ↑ "IMF Launches New SDR Basket Including Chinese Renminbi, Determines New Currency Amounts". www.imf.org. Retrieved 2017-06-08.
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