China’s senior banker wants IMF reform before EU aid

11/11/2011 06:36

EU:  China cannot afford to have Europe fail: If help is needed, it will be considered through the International Monetary Fund (IMF). But the priority remains to finalise the IMF quotas reform, Xie Duo, a senior official at China's central bank, said in an interview with EurActiv.
Background

The International Monetary Fund (IMF) already participates in EU bailouts, providing one-third of the funding made available to rescue Greece, Ireland and Portugal from bankruptcy.

This means non-euro members such as Britain and the United States indirectly participate to these bailouts.

In December 2010, the IMF Board of Governors, the Fund’s highest decision-making body, approved a package of far-reaching reforms of the Fund’s quotas and governance, notably to shift more voting powers to emerging-market economies, such as China.

In future, the 10 IMF members with the largest voting share will be the United States, Japan, China, Brazil, India and Russia as well as France, Germany, Italy and Britain.

The IMF is the best vehicle to help debt-laden European countries if needed, and China would support such a move, said Duo.

Bbut IMF members must promptly advance on reforming the IMF quota system, added Duo, who is director-general for the Financial Market Department at the People's Bank of China.

IMF quota is the money that a country, member of the IMF, has to give the fund so that it can lend to countries needing help. That has an impact also on voting rights within the international organisation.

China has already invested a lot in EU assets, Duo said. “Our leaders made the promise to hold euro-denominated assets and we are already net investors in EU countries,” he said.

“The IMF has the capability to enlarge its lending, but the priority is to timely finalise the quotas distribution,” he insisted.

The banker echoed China’s President Hu Jintao, who at the last G20 meeting in Cannes called to advance the reform of the international monetary system in a steady manner, expand the use of the special drawing rights (SDR) of the IMF, reform the SDR currency basket, and build an international reserve currency system with stable value, rule-based issuance and manageable supply.

Europe needs structural reforms, not money

Duo insisted that the perceived attack on the eurozone is only temporary. “After the EU will put its house in order, the euro will be much stronger,” he added, noting that acting on structural reforms would ease market pressure.

“Europe needs structural reforms, not money at moment,” he said.

More fiscal discipline, but also a more balanced welfare system and more flexible labour policies would reassure the markets, said the Chinese official.

Whether that would reassure China and other emerging G20 economies as well to invest in the European Financial Stability Facility (EFSF), the eurozone bailout fund, Duo did not want to speculate, but said he was confident the EU would solve its debt crisis on its own.

“Europe is one of the biggest economy in the world, it has high productivity and high GDP per capita, its industrial basis is strong, households saving rate in the EU is higher than in the US, and the euro is already a reserve currency,” the Chinese Central bank official said.

Credit rating agency overhaul

Beijing would fully support the setting up of a European credit rating agency, Duo said.

“We need a different model of rating to prevent cyclical effects,” he said, explaining that investors cannot depend only on established rating agencies and that financial assessments need to be done also by investors, not only issuers of financial products.

Brussels has moved to force companies that rely on the ‘big three’ ratings agencies to seek credit opinions from smaller rivals to increase competition. Policymakers describe the global dominance of Moody's, Fitch Ratings and Standard & Poor's as an oligopoly and the European Commission has proposed to force issuers of financial products to regularly change the ratings agency they are using, also to avoid conflicts of interest.

Credit rating agencies have been widely blamed for failing to identify the risk attached to certain financial products such as mortgage-backed securities in the US at the start of the financial crisis.

More recently they have been heavily criticised for exacerbating market turmoil in the eurozone, with Standard and Poor's downgrading of Greek and Italian bonds, sparking a surge in their borrowing costs.

“Rating agencies can be a reference but there needs to be a shift from the commercial model of rating agencies, putting the responsibility also on the investors and not only on the issuers,” said Duo.

China has now demanded financial institutions to do their own assessment of investment products and not only rely on the usual rating agencies. “We need a system of double rating,” he added.
Positions

Yesterday (8 November), Christine Lagarde, Managing Director of the International Monetary Fund (IMF) emphasised the important role of Asia, and especially China, in achieving global economic recovery.

“The rise of Asia in the global economy is really the defining economic success story of modern times. And so today, it is no surprise that Asia is propelling the global recovery,” she said in a speech at the International Finance Forum in Beijing.

"In our increasingly interconnected world, no country or region can go it alone. We are bound together by our economic success - or failure."

Lagarde called on the advanced economies to strike the appropriate balance in fiscal and monetary policies to promote stability and growth, push ahead with structural policies to boost competitiveness and employment, and strengthen financial regulation to make the financial sector safer and to put it back in the service of the real economy.

Turning to Asia, Lagarde noted a difficult balancing act: “Countries need to prepare for any storm that might reach their shores. But some face continued overheating pressures and risks to financial stability from prolonged easy financial conditions.”

She advised Asian countries to respond nimbly, and change course if the global economic environment deteriorates further. “For example, policymakers can ease off the fiscal brakes, draw on reserves or regional reserve pooling arrangements, and reactivate central bank swap lines,” she said.

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