TWN Info Service on Finance and Development (Jul07/01)

03 July 2007

CHINA CRITICIZES IMF DECISION ON EXCHANGE-RATE SURVEILLANCE

China has openly criticized a recent decision by the International Monetary Fund that it sees as part of the US pressure to get a quicker appreciation of the renminbi. Its top finance officials have also criticized the manner in which the decision was adopted at the IMF in spite of objections and reservations from developing countries and warned that policies implemented without wide acceptance of the membership could weaken the reputation and supervisory role of the IMF.

The new Decision represents a policy framework guiding the IMF’s surveillance over member states’ compliance with obligations under Article IV of the IMF Articles of Agreement which includes, among others, an obligation “to 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”. This revision of the 30-year-old framework adds a new principle that a member should avoid exchange rate policies that result in external instability regardless of their purpose.

Below is a report on Chinese reactions to the new IMF decision. It was published in SUNS # 6283 Monday 2 July 2007.

With best wishes
Martin Khor
TWN

China Criticizes IMF Decision on Exchange-Rate Surveillance

By Chee Yoke Ling and Celine Tan

China has openly criticized a recent decision by the International Monetary Fund that it sees as part of the US pressure to get a quicker appreciation of the renminbi.

Its top finance officials have also criticized the manner in which the decision was adopted at the IMF in spite of objections and reservations from developing countries and warned that policies implemented without wide acceptance of the membership could weaken the reputation and supervisory role of the IMF.

The People’s Bank of China (PBOC) issued a statement of criticism on its website on 20 June entitled “IMF adopted the Decision on Bilateral Surveillance over Member’s Policies with China’s Reservation”.

The statement puts on public record that “China has expressed reservations about the adoption of this Decision as it does not fully reflect the developing countries’ opinions”.

The IMF’s Board of Directors adopted on 15 June the Decision on Bilateral Surveillance over Members’ Policies to replace the Decision on Surveillance over Exchange Rate  policies that it adopted in 1977.

The new Decision represents a policy framework guiding the IMF’s surveillance over member states’ compliance with obligations under Article IV of the IMF Articles of Agreement which includes, among others, an obligation “to 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”.

This revision of the 30-year-old framework adds a new principle that a member should avoid exchange rate policies that result in external instability regardless of their purpose. According to the IMF, this fourth principle “focuses on the outcome of the policies at issue rather than their intent”. This means that a member could be found in breach of the aforementioned obligation if their exchange rate policies are deemed by the Fund to have caused external instability even if that is not their intent.

The IMF also adds that the new decision gives “clear guidance to Fund members on how they should run their exchange rate policies and on what is and is not acceptable to the international community”.

Broader powers are given to the IMF to determine what constitutes “exchange rate manipulation” and this concept itself is also defined in the 15 June Decision. Under the new Decision, the Fund could deem a member in breach of its Article IV obligations if it found that the member had engaged in policies targeted at and actually affecting the level of exchange rate with the purpose of “securing fundamental exchange rate misalignment in the form of an undervalued exchange rate” in order “to increase net exports”.

This is seen by a number of developing countries and also by experts as the result of the US seeking to get the IMF to more easily intervene in determining whether a country is manipulating its currency. Both the US Administration and the Congress have been persistently asserting that the renminbi is undervalued and needs to appreciate significantly to deal with China’s trade surplus with the US (a link that is disputed by China and many trade experts as the solution to the trade imbalance).

According to the Financial Times, China formally opposed the new surveillance framework at the Executive Board meeting which adopted it, while Iran abstained from the decision and that Egypt had also raised reservations regarding the reforms.

In its statement on its website, the PBOC said: “China has expressed reservations about the adoption of this Decision as it does not fully reflect the developing countries’ opinions”.

It reiterates that at the core of the international monetary system, “the IMF has a mandate to maintain the stability of the international monetary system and global financial system”.

The PBOC further stated: “The current changes in the international monetary and financial systems are taking place against the background of fundamental changes in the global economy and allocation of production factors.

“The Fund, in its surveillance over policies of members, should take into full consideration the fundamental impacts of economic globalization, adjustment of industrial division of labour and advances in science and technology on the global economy, value the relationship between domestic economic stability and external stability, objectively look at the role of exchange rate policies in helping a country to achieve external stability, and strengthen policy surveillance over those members who issue major reserve currencies and exert thus vital impact on the stability of [the] global system”.

The PBOC went on to say that in the past years, “many developing countries, China included, have worked hard to adjust domestic economic structure, improve market mechanism and increase exchange rate flexibility. These efforts have contributed to rapid growth of the global economy”.

The statement emphasised that “Experience has shown that exchange rate adjustment has a certain role to play in resolving external imbalances, but it is not the ultimate and only policy instrument. Large and disorderly exchange rate adjustment will not only exacerbate external instability, but also affect the sustainability of a country’s domestic economic growth, and subsequently, the sustainable growth of global economy and stability of international financial market”.

It said that developing countries, including China, call on the IMF to follow the important principles extensively agreed upon by its members, including “creating no new obligations for members, paying due regard to the circumstances of members and the need for evenhandedness in the practice of surveillance.”

The statement also said: “To maintain global economic and financial stability, the International Monetary Fund should fulfil its surveillance function by strengthening communications and dialogue with members on the basis of mutual understanding and respect”.

While the IMF in its 21 June public information notice calls the 15 June Decision an “effort to upgrade the foundations of the IMF’s bilateral surveillance – the activity whereby the IMF monitors the economic and financial policies of its member countries, in the interest of international monetary stability”, many developing countries have had reservations about the revision of the surveillance decision all along.

At the spring meetings of the IMF and World Bank in April this year, the Group of 24 developing countries had expressed concern that “expanding the principles for the guidance of members in the Decision would blur the distinction between surveillance over exchange rate policies and over domestic policies” and cautioned against a move towards a compliance-based relationship between the Fund and their members as a consequence of any surveillance reform.

Even then, Hu Xiaolian, deputy governor of the PBOC, was quoted by China Daily (16 April) as saying that the IMF “should respect its member countries’ core interests and actual economic fundamentals ... Biased advice would damage the Fund’s role in safeguarding global economic and financial stability”.

China maintains that any large fluctuations in currency rates would be harmful to its domestic economy and to others around the world.

Following the adoption of the new Decision, Ge Huayong, China’s Director on the

IMF Board, told Xinhua news agency that the disagreement by developing countries over some basic issues means that differences may arise in policy evaluation and advice. “If concepts and methods are used that are inaccurate or not widely accepted, the reputation and supervisory role of the IMF may be weakened,” he said.

Mr. Ge added that “supervision under the new rules will put greater pressure on emerging market countries but will have little impact on developed countries. This is quite unfair”.

Beijing’s stand, according to Mr. Ge, “has received support and understanding from some developing countries, but due to the push by a tiny number of developed countries with major voting power in the IMF, the decision still passed. This is regrettable”.

Mr. Ge also said that the IMF’s supervision of reserve currency-issuing countries had been inadequate, referring to the US without naming the country. This point was also made in the PBOC statement that stressed the need for the IMF to “strengthen policy surveillance over those members who issue major reserve currencies and exert thus vital impact on the stability of [the] global system”.

Sentiments are strong in China that the IMF Decision is a move to increase pressure on the country to allow a faster revaluation of the renminbi. According to the China Daily, Chinese analysts called the new IMF rules “a product of heavy US pressure”.

At the opening of an international forum last week on the 10th anniversary of the

1997/98 Asian financial crisis, another PBOC deputy governor, Wu Xiaoling, repeated that a stronger renminbi is no panacea and urged other countries to be patient on the country’s exchange rate reforms. She stressed that there will be no change to the current policy of gradual appreciation of the renminbi that was adopted two years ago.

According to the China Daily, Ms. Wu cited the examples of Germany and Japan,

saying that a stronger exchange rate alone was not the solution. The two countries

retained big trade surpluses despite powerful rises in their currencies.

Ms. Wu indicated that China hopes to follow those countries in balancing her external account by exporting capital.

In the forum’s discussions on lessons to be learned from the last Asian financial crisis, it was recalled that China was praised for not devaluing the renminbi after speculative attacks brought down the Thai baht and Malaysian ringgit, among other regional currencies.

Two weeks ago, four US senators pushed for Congress to pass a law that would penalize countries with “misaligned” currencies, hours after the Bush Administration refused to cite China as a currency manipulator in its semi-annual report on International and Exchange Rates Policies.

In response, China called for a dialogue of equals instead of the US trying to put pressure on Beijing, according to a Reuters report. At a regular news conference, Qin Gang, a spokesman of the Ministry of Foreign Affairs, said: “We hope the US Senate and Congress can view from a strategic perspective the importance of the healthy development of China-US economic relations ... and not politicize economic and trade issues, and not resolve issues by exerting pressure”.

It is thus no surprise to many in China that the PBOC issued its statement cautioning the IMF against joining those who are pressuring for a faster appreciation of the renminbi.