At the G20 Summit, What Will China Gain and Contribute?
12 November 2008
The G-20 Meeting in Washington November 14-15 is historically significant for the following reasons: Since the G-20 founding in 1999 with its first meeting in Berlin, these gatherings were for finance ministers and central bankers from Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa South Korea, Spain, Turkey and USA to meet. However at the November 14-15 meeting, China will not be represented by its finance minister and central banker, but by its President HU Jintao along side of US President George Bush, French President Nicolas Sarkozy, German Chancellor Angel Merkel, U.K. Prime Minister Gordon Brown, Australian Prime Minister Kevin Rudd, Indian Prime Minister Manhohan Singh, Spanish Prime Minister Jose Zapatero, Russian President Dmitry Medvedev and other including the Managing Director of the International Monetary Fund (IMF), the President of the World Bank and others.
China’s stature will gain recognition for the following reasons:
First, China currently has only 3.5% voting power at the IMF. The US has 17 % voting power and a veto over important decisions requiring an 85 % super-majority. Since China’s government is cash rich and the IMF is cash poor, negotiations will likely change China’s voting power inside the IMF.
Secondly, at the most recent G-20 meeting of finance ministers and central bankers in Sao Paulo, Brazil on November 8-9, 2008, the group emphasized: “One of the most deleterious aspects of the current crisis is the freeze in the private credit and equity markets and the tendency of capital to flow back to where the current crisis originated.” This creates havoc for emerging markets where loans have been made in dollars. The increased flow of capital into the US dollar reduces investment, employment and consumer spending in emerging economies. At the same time, local currencies are devalued and payment of principal and interest back to creditors is more expensive. This risk makes a solution imperative to avoid anything looking like a banking holiday, last seen in 1933.
Thirdly, increasing interest rates as a means to defend one’s currency is lovely when creditors feel comfortable in getting their money back. But recessions do not normally warm the hearts of lenders whose fears of getting repaid cause irregular heartbeats when economies are showing negative growth rates. In such a case, increasing interest rates and reducing fiscal spending can have a compounding negative effect as local capital flees from the country in search of safe havens. Eventually, local government use up their reserves to defend their exchange rates. At that time, these debtors turn to the IMF for loans. During the Asian financial crisis in the late 1990’s the world witnessed this scenario. Today, the current financial crisis has similarities to those crises in Thailand, Korea and Indonesia. Many countries are now turning to the IMF for help.
Fourthly, China’s economic strategy is in the middle of the philosophies of free markets and central planning. While its economy is slowing down from more rapid pace, its current pace is positive, not negative as several other types of markets point to. This is an ideal time for hardliners from both free markets and central planning persuasion to ponder inwardly China’s success in giving government a vital role to make markets work better.
This is the first of five articles which deals with China’s rising role in international monetary affairs and will address the following questions. Will China receive a greater voice in international monetary system and in the regulation of financial system? What will China’s contribution be at the summit? What is the role China is playing in keeping the status quo of US dollars’ “hegemony”? Is there any emerging or potential trend that a “China-US axis” will keep and manage the evolution of the current world economic order? Can the summit change Americans’ mentality towards China’s sovereign Wealth Fund? After the summit the Strategic Economic Dialog (SED) will come to Beijing. What would be the topics this time? Is Obama going to make any difference to US’s China-play?
(Thomas Wilkins, CFA is the Chief Executive Manager of Joseph Jekyll Advisers LLC at thomaswilkins5@charter.net. )
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At the G20 Summit, What Will China Gain and Contribute?
12 November 2008
The G-20 Meeting in Washington November 14-15 is historically significant for the following reasons: Since the G-20 founding in 1999 with its first meeting in Berlin, these gatherings were for finance ministers and central bankers from Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa South Korea, Spain, Turkey and USA to meet. However at the November 14-15 meeting, China will not be represented by its finance minister and central banker, but by its President HU Jintao along side of US President George Bush, French President Nicolas Sarkozy, German Chancellor Angel Merkel, U.K. Prime Minister Gordon Brown, Australian Prime Minister Kevin Rudd, Indian Prime Minister Manhohan Singh, Spanish Prime Minister Jose Zapatero, Russian President Dmitry Medvedev and other including the Managing Director of the International Monetary Fund (IMF), the President of the World Bank and others.
China’s stature will gain recognition for the following reasons:
First, China currently has only 3.5% voting power at the IMF. The US has 17 % voting power and a veto over important decisions requiring an 85 % super-majority. Since China’s government is cash rich and the IMF is cash poor, negotiations will likely change China’s voting power inside the IMF.
Secondly, at the most recent G-20 meeting of finance ministers and central bankers in Sao Paulo, Brazil on November 8-9, 2008, the group emphasized: “One of the most deleterious aspects of the current crisis is the freeze in the private credit and equity markets and the tendency of capital to flow back to where the current crisis originated.” This creates havoc for emerging markets where loans have been made in dollars. The increased flow of capital into the US dollar reduces investment, employment and consumer spending in emerging economies. At the same time, local currencies are devalued and payment of principal and interest back to creditors is more expensive. This risk makes a solution imperative to avoid anything looking like a banking holiday, last seen in 1933.
Thirdly, increasing interest rates as a means to defend one’s currency is lovely when creditors feel comfortable in getting their money back. But recessions do not normally warm the hearts of lenders whose fears of getting repaid cause irregular heartbeats when economies are showing negative growth rates. In such a case, increasing interest rates and reducing fiscal spending can have a compounding negative effect as local capital flees from the country in search of safe havens. Eventually, local government use up their reserves to defend their exchange rates. At that time, these debtors turn to the IMF for loans. During the Asian financial crisis in the late 1990’s the world witnessed this scenario. Today, the current financial crisis has similarities to those crises in Thailand, Korea and Indonesia. Many countries are now turning to the IMF for help.
Fourthly, China’s economic strategy is in the middle of the philosophies of free markets and central planning. While its economy is slowing down from more rapid pace, its current pace is positive, not negative as several other types of markets point to. This is an ideal time for hardliners from both free markets and central planning persuasion to ponder inwardly China’s success in giving government a vital role to make markets work better.
This is the first of five articles which deals with China’s rising role in international monetary affairs and will address the following questions. Will China receive a greater voice in international monetary system and in the regulation of financial system? What will China’s contribution be at the summit? What is the role China is playing in keeping the status quo of US dollars’ “hegemony”? Is there any emerging or potential trend that a “China-US axis” will keep and manage the evolution of the current world economic order? Can the summit change Americans’ mentality towards China’s sovereign Wealth Fund? After the summit the Strategic Economic Dialog (SED) will come to Beijing. What would be the topics this time? Is Obama going to make any difference to US’s China-play?
(Thomas Wilkins, CFA is the Chief Executive Manager of Joseph Jekyll Advisers LLC at thomaswilkins5@charter.net. )
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