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Crisis may increase China's role in IMF

By Zheng Lifei (China Daily)
Updated: 2008-12-22 07:53

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The ongoing global financial crisis may present China with a good chance to increase its quota and voting power in the International Monetary Fund (IMF) but any move should be taken with caution and prudence, experts say.

Calls to change the quota and voting system in the Washington-based multilateral financial institution have been the subject of bitter debate for years, with some industrialized member countries reluctant to give ground to emerging market economies.

Under the current regime, the distribution of quotas is determined according to complex mathematical formulas. A member's quota determines its voting power and access to IMF financing.

Every IMF member is automatically granted 250 basic votes, and additional votes are meted out according to the country's quota in the Fund.

Although the IMF did take a major step to increase quotas for four developing economies: China, South Korea, Mexico and Turkey, experts say China and other emerging countries' quota in the IMF is still underrepresented.

As the financial crisis deepens and spreads, there will be opportunities for these emerging countries to up their stakes in the IMF as the financial institution may seek more capital injections to strengthen its ability to help countries hit by the crisis, experts say.

Proposals have already been made for countries to contribute more money to the IMF.

But as developed countries are themselves under financial strains, their ability to contribute new money into the IMF is quite limited, while at the same time BRIC countries (Brazil, Russia, India and China) hold significant amount of foreign exchange reserves that the IMF badly needs.

"The BRICs then could leverage their huge foreign exchange reserves to demand quotas and voting weight increases if they are to contribute more fund to the IMF," says Zhang Ming, a researcher at the Institute of World Politics and Economy with the Chinese Academy of Social Sciences (CASS).

"This is a good opportunity for them, including China," Zhang says.

And the IMF's quota and voice reform should reflect the reality and development trend of the world economy, meaning emerging countries should have more say in the institution, experts say.

The current makeup of the IMF, which was founded in the wake of World War II, has failed to reflect the interests and increasing power of emerging countries, says Mei Xinyu, a researcher with the Chinese Academy of International Trade and Economic Cooperation, affiliated to the Ministry of Commerce.

"If the IMF does not take into consideration concerns and interests of emerging countries such as China, they will not be motivated to participate in any kind fund contribution," Mei says.

The quotas and voting weight of US and Europe, Mei says, should be lowered while those of emerging countries should be increased to reflect the changing world economic landscape.

The IMF'S current total capital is over $300 billion, of which the US contributed 17 percent and the cumulative share of the EU is 41 percent.

The voting weight of China in the IMF is around 4 percent and China's economic volume accounts for about 5 percent in terms of exchange rates in the international market, and 11 percent in terms of purchasing power parity, according to Vivek Arora, the IMF's chief representative in China.

Although most experts agree that the current financial turmoil and China's relatively strong financial position and huge foreign exchange reserve presents the country with a good chance to get its quota and voting weight in the IMF increased, some say the country should proceed with caution as long as US holds veto power in the institution.

"It makes no sense at all when US can veto any major bills or motions even if China gets more voting power," says Cao Honghui, director of International Finance Research Center of Institute of Finance and Banking at Chinese Academy of Social Sciences.

Since major IMF decision-making requires at least 85 percent of the vote, the US has the voting weight, making it the sole country with a one-vote veto.

"Then why should we devote so many diplomatic and financial resources to get it?" Cao says.

His view is shared by Wang Xiaoyi, deputy director of State Administration of Foreign Exchange.

"US veto power should be removed. Scrapping the veto power of the US will change the leadership of IMF and give emerging market countries a stronger voice," Wang, who was IMF executive director from 2003 to 2006. said at a forum titled "Advanced Forum on Global Finance and Economy" at Tsinghua University last month.

Wang believes that the international financial system should change, and the role of regional currencies should be enlarged.

At the international level, Wang says the IMF should remain but reform is needed.

Li Pan contributed to the article