U.S. will come to regret holding back China at the IMF
Washington cannot expect Beijing's help with dollar or inflation
Zhou Xin is senior vice president for public affairs at artificial intelligence-driven molecular imaging company Evomics Medical in Shanghai and executive chief editor of AI community platform The Yuan.
"The dollar is our currency, but your problem," then-U.S. Treasury Secretary John Connally told European finance ministers in 1971.
His comment has proved prophetic. The monetary policy of the administration of U.S. President Joe Biden is driving the International Monetary Fund into a volatile corner while current Treasury Secretary Janet Yellen is seeking to hold China responsible.
Due to U.S.-China tensions, financial flows are increasingly being channeled to countries deemed "geopolitically close" to one side or the other. According to a report by IMF economists, if the world further divides into two blocs, global output is likely to drop around 1% within five years, with the impact rising to 2% over the long term.
Decoupling also threatens to strip the IMF of meaning, though the agency is already losing significance. When the IMF warned last month of rising global financial risks, Yellen fired back that the U.S. economy was doing exceptionally well -- overlooking the failure of two large American banks the previous month.
China has spurned repeated requests from Yellen to visit the country while drifting further away from the U.S. and IMF in terms of policy.
Beijing is clearly seeking to break the dollar's stranglehold and has been trimming its holdings of U.S. Treasury bonds. While the size of its portfolio ticked higher in March, according to the latest data from Yellen's department, this marked only a slight rebound from the 13-year low of $848.8 billion seen with its holdings in February.
In the wake of Russia's invasion of Ukraine, trade settlement between Russia and China has shaken off IMF frameworks in favor of exchanges of yuan. The yuan has also become the medium for China to pay for Saudi and Iranian oil and, most recently, to purchase Brazilian commodities.
This shift in part reflects China's frustrations with the IMF and its resolve to look past the Washington-based institution. Beijing has spent nearly three decades conveying to the IMF its aspiration to take a major role in the running of the institution to relatively little effect.
Last May, the IMF cautiously increased the weighting of the yuan in its Special Drawing Rights, as well as that of the dollar, while reducing the proportions allotted for the euro, yen and pound.
This past March, IMF Managing Director Kristalina Georgieva met with Chinese Premier Li Qiang on the sidelines of the Boao Forum for Asia to talk about expanding Beijing's role in the fund. Li cited the necessity of "enhancing the voice and influence of emerging market countries and developing countries in international affairs."
The following month, Georgieva put forth a plan to reform the fund's mission and operations but struggled to win support. The U.S. still holds the largest voting power at the fund, wielding a veto over virtually all major decisions.
Middle- and low-income countries, which make up 85% of the world's population, have only a smidgen of voting power. China itself has 6.394% of the voting rights, slightly less than that held by Japan despite having an economy three times larger.
For the U.S., the current arrangement is fitting. The U.S. sees the stability of the greenback as the core of global financial stability, especially with Yellen forecasting the country's national debt will swell to $51 trillion.
At the same time, the U.S. Congress has held up efforts to expand the IMF voting rights of emerging countries. Conservatives do not want Washington to yield any influence in the organization.
The delay has cost Georgieva her chance. Even if the issue of China's voting rights were brought up for discussion now, Beijing would have some ambivalence. Everyone knows that an increase in its stake now will mean taking on a greater share of the burden of paying for what may be the largest inflation outbreak in the history of the world.
China manifestly does not want to do this. After three years of COVID-19, the country has set to work on economic revival which has also helped boost international yuan usage. The yuan is now the fifth-most used currency for global foreign exchange transactions. In March, China used more yuan in its cross-border transactions than dollars for the first time.
Georgieva wants to rope in emerging economies like China to help rebuild the global financial system. The large-scale stimulus policies enacted by Western countries through the pandemic have left the world grasping for handholds on an inflationary ocean.
The U.S. too wants China's cooperation, but at this point, Beijing's reply is: "The dollar is your currency and your problem."
The way things are moving though, the new line may be: "The yuan is our currency, but your problem."