China, The IMF, and Dominique Strauss Kahn

What do China, the IMF, and Dominique Strauss Kahn ("DSK" hereafter) share in common? Most media have become transfixed by front page coverage of how the now disgraced banker's political career was destroyed by a low paid, immigrant maid. Rather than go into the increasingly lurid details, of which many other sources are covering, I will attempt to explain the potential ramifications on the IMF and China.

There is now a power vacuum in place at the IMF. While an interim head has been selected, no permanent selection mechanism has been activated. Instead, we are witnessing an intense, behind the scenes political jockeying for power and influence that stretches around the globe. I speak of course about China and her ambitious rise to prominence.

For years, the IMF has been dominated by a succession of figures chosen from the ranks of Western European and American financial and government elites. The selection process is a delicate balance that in theory has a foundation in its quota system. Quotas are broad reflections of member states' econonomy. Dues or quota subscriptions are 25% paid in a major international currency (e.g. typically $, Euros, or yen w/the dollar being preferred) and the remainder 75% in their own currency.

The quota system for emerging economies was raised in April 2008. The system is reviewed every 5 years - w/the next review having been completed earlier this year (2years ahead of schedule) in January.

So, how does the above apply to China? January is not so far away from May that a re-assessment may be called for by some members on the governing council. China's has strong incentives to get a native representative (or at least someone loyal to Beijing's cause). In 2010, China surpassed Japan to become the world's second largest economy. In 2011, she remains the world's most populous state. Chinese loans are supporting the economic backbone of the West - a teetering EU and a profligately consuming USA. It is w/regards to American spending that this tense dynamic that is currently underscoring international trade and public policy.

In multiple speeches during the past two years, Chinese officials have repeatedly voiced their concerns about the viability of the dollar's role as a reserve currency.

Open calls to American politicians to preserve the value of their investments have been ignored. Actions always speak louder than words and while US officials publicly support a strong dollar policy their actions speak to the direct opposite. China is not entirely w/o fault however as Congressional calls for China to revalue the renminbi have an air of truth about them.

One interesting angle of critique has been the proposal for a new SDR currency that would place the renminbi among the basket of currencies allowed to be held in the 25%quota.

Besides the symbolic value, a Chinese Managing Director (CMD) of the IMF would secure substantial political leverage against the American's weak dollar policy and ensure a margin of security against Congressional voices against a strengthening renminbi. From the IMF's podium, the CMD would be able to issue damning critiques against the Federal Reserve and US Treasury w/the full force of international law (for what that's worth).

A more focal point is the IMF's control over the purse strings of emergency bailout loans to sovereigns. The IMF has historically made loans to developing nations (formally referred to as the 3rd world). If a global cooling in commodity prices does occur, these emerging market nations that have been the recipients of so much hot money would face capital flight and enormous political/economic devastation. China itself has been pumping large amounts of capital into sub-Saharan Africa, Latin America, and South Asia. A CMD would be able to direct the organization to help offset any losses the Chinese state would suffer on these investments. More ominously, the day may come in the not so distant future that the IMF's funds may be directed in the explicit bailout of a Western European or (and previously unthinkable) America itself.

But it is not so cut and dry. The United States has a major say in determining who will head the IMF, in part because it holds the largest number of votes at the 187-nation international lending agency, in the quota system. Both sides have likely begun marshaling allies to support bids for respective candidates.



The bottom line: DSK's fall from grace is not the main story. China has been lobbying for years to obtain a stronger international voice. Placing a Managing Director favorable to Beijing would ensure it greater leverage against the USA.