And You Wonder Why China Formed Its Own Multilateral Banks

Posted by on Dec 16, 2014 in Blog | 0 comments

There is one prime reason why China is frustrated with US-led multilateral financial institutions – the inability or reluctance on the part of the Republican dominated US Congress to ratify the International Monetary Fund’s (IMF) 2010 Quota and Governance Reforms. Ironically, the reforms were driven through by the Americans whose obstructionism now forces the IMF board to explore a “Plan B” for “alternative options”.

Building on the 2008 reforms, the current package which must be accepted by 3/5 of members that have 85% of total voting power would have resulted in a major realignment of quota shares in favour of emerging economies and developing countries (EMDCs). Needless to say, currently, the US dominates with 16.75% of votes followed by Japan (6.23%), Germany (5.81%) and France and the UK (each with 4.29%). China leads the BRICS countries with 3.81%, then Russia (2.39%), India (2.34%), Brazil (1.72%) and South Africa (0.77%).

Apart from doubling the quotas of special drawing rights (SPR) to worth some US$737 billion, the 14th General Review of Quotas would have shifted 6% of quotas from over-represented to under-presented countries, lifting all but one of the BRICS into the 10 largest shareholders with China rising to no.3. But, obviously, in the backdrop of Western sanctions imposed on Russia over the Ukraine crisis, any reform that would benefit Russia could not possibly be contemplated by the US and its allies.

In a statement on the US inaction, IMF Managing Director Christine Lagarde expressed her deep regret: “The IMF’s membership has been calling on and was expecting the US to approve the IMF’s (reforms) by year end. I have expressed my disappointment to the US authorities and hope that they continue to work toward speedy ratification.” This represents the second time this year the US has refrained from approving, dampening the prospects of its passing in the first half of next year.

Chinese foreign ministry spokesman Hong Lei also sounded China’s dissatisfaction: “China is deeply disappointed by the US parliament’s failure to make the IMF 2010 funding and governance reform spending legislation…Implementing (the reform) is crucial for maintaining the credibility, effectiveness, and legality of the IMF.”

But, it’s not only the IMF that needs urgent reform, the World Bank (WB) and its sister institution the Asian Development Bank (ADB) require significant realignment as well. Among the multilateral financial and monetary institutions created after WWII, the IMF is ordinarily lead by a European, the WB by an American (currently Jim Yong Kim), and the ADB by a Japanese (Takehiko Nakao).

In 2010, voting power in the WB was revised somewhat to better reflect the interests of EMDCs but the West and Japan still dominate: US (15.85% down from 16.36%), Japan (6.84% down from 7.85%), Germany (4% down from 4.48%), France and England (both 3.75% down from 4.3%) and Canada (down to 2.43%). The BRICS had China with 4.42% up from 2.78%, India with 2.91% up from 2.78%, Russia roughly at par at 2.77%, Brazil up to 2.24% from 2.07%, and South Africa down from 0.85% to 0.76%.

As of last year, the top ten voting power countries in the ADB were: the EU (15.718%), Japan (12.835%), the US (12.747%), China (5.474%), India (5.384%), Australia (4.946%), Canada (4.5%), Indonesia (4.437%), South Korea (4.345%), Germany (3.773%), and Malaysia (2.486%). The top three regions/countries alone account for 41.3% of the total vote. Adding in Australia, Canada and Germany, the voting power of Western countries equals 54.519% assuring the passing of Western agendas.

Given the size of its economy that should top US$9.9 trillion by year end using exchange rate terms (the IMF already has China eclipsing the US in 2014 using purchasing power parity (PPP) @ US$17.6 trillion to $17.4 trillion), it is no wonder China and other EMDCs demand a bigger say and role in the governance and loaning practices of these institutions.

In my next post, I’ll focus on the new multilateral banks and funds that China has conceived and set up over the past year at the behest of President Xi Jinping: the BRICS New Development Bank, the BRICS Contingent Reserve Fund, The Asian Infrastructure Investment Bank, and the land-based and maritime Silk Road funds. Chinese explanations to the contrary notwithstanding, most analysts perceive these institutions and funds to be rivals of US-led counterparts.