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China's aid to IMF shows it's a responsible power
By Sun Lijian |
July 6, 2012, Friday
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Print Edition
Print Edition
THE People's Bank of China announced on June 19 that China will contribute US$43 billion to IMF recapitalization.
The United States, the No.1 world economy, didn't follow suit. Why did China make such an unprecedented contribution to the world's leading financial rescue vehicle? I think the reasons are threefold.
Firstly, China is closely linked with Europe. In terms of inter-governmental relations, the diversity of Chinese foreign exchange reserves would be impossible without the security of euro-denominated assets. If the euro nosedives due to the debt crisis currently in full swing, a scenario often accompanied by runaway inflation, China's newly laid-out strategy to improve its forex reserve portfolio would suffer a serious setback.
Besides, European authorities view Chinese investments, especially those made by state-owned enterprises, less skeptically than their American counterparts, who often resort to protectionist measures to scuttle Chinese business initiatives.
In terms of corporate contributions, quite a few European multinationals have benefited China through their operations in the country. They employ a large number of people; they help nurture China's management talents; they also impart advanced technology.
Now, with the appreciation of the yuan and price increases of global commodities, Chinese firms have arrived in Europe in search of new opportunities to grow. Therefore, a stable European economy is one of the preconditions for our businesses to realize their ambition of going global.
Amicable ties
In 2005 Europe became China's largest trade partner. Now that China is retooling its growth pattern, an open and prosperous Europe means this process will be more smooth, while China reduces its dependence on trade.
So at the critical juncture of the debt drama unfolding in Europe, China's capital infusion in IMF is also aimed at cementing the amicable ties built over the years with Europe.
Secondly, China's fund infusions can be interpreted as a choice to diversify its forex reserve portfolio, and to participate in reform of global monetary system at the earliest stage.
Thirdly, China's capital infusion attests to its image as a responsible stakeholder in helping free the world from the economic crisis.
There are several ways to help Europe. One is to lend to Europe via the IMF, whose role resembles that of a nation's central bank during a crisis - lender of last resort. Unless necessary, a central bank doesn't inject funds into the capital market, for unconditional, no-questions-asked bailout carries high moral risks. China's infusion in the IMF is thus the most secure, in that the sums that will be dispensed to indebted eurozone countries are reliant on their eligibility for bailout.
Another means of financial rescue is the ad hoc mechanism established by the EU and European Central Bank (ECB), called EFSF (European Financial Stability Facility), which is basically a mini-IMF formed with funds contributed by eurozone members.
All these contributors stand to benefit from a stable eurozone, so the bailouts they carry out might not be in the best interests of interested outsiders. China isn't involved in this scheme out of concerns that the information asymmetry might hurt its interests.
Another similar rescue option is the EFSM (European Financial Stability Mechanism).
Under those two schemes, most assets are denominated in euros. Therefore, if the ECB steps in to purchase troubled assets, for example, if it launches LTROs (long-term refinancing operations), then creditors' assets will shrink in value. And outside stakeholders like China face higher and more complex risks than do European creditors.
Finally, there is bilateral aid. China can buy bonds issued by Greece and Spain, but apparently this form of rescue will be even riskier than the above-mentioned several means of support in the absence of conditions or scrutiny from the creditors.
To sum up, China's new generosity to IMF signifies its sense of responsibility as a rising power. Meanwhile, the manner in which it made its contributions is also accountable to domestic taxpayers.
The author is executive vice dean of the School of Economics at Fudan University. Shanghai Daily staff writer Ni Tao translated his article from Chinese.
The United States, the No.1 world economy, didn't follow suit. Why did China make such an unprecedented contribution to the world's leading financial rescue vehicle? I think the reasons are threefold.
Firstly, China is closely linked with Europe. In terms of inter-governmental relations, the diversity of Chinese foreign exchange reserves would be impossible without the security of euro-denominated assets. If the euro nosedives due to the debt crisis currently in full swing, a scenario often accompanied by runaway inflation, China's newly laid-out strategy to improve its forex reserve portfolio would suffer a serious setback.
Besides, European authorities view Chinese investments, especially those made by state-owned enterprises, less skeptically than their American counterparts, who often resort to protectionist measures to scuttle Chinese business initiatives.
In terms of corporate contributions, quite a few European multinationals have benefited China through their operations in the country. They employ a large number of people; they help nurture China's management talents; they also impart advanced technology.
Now, with the appreciation of the yuan and price increases of global commodities, Chinese firms have arrived in Europe in search of new opportunities to grow. Therefore, a stable European economy is one of the preconditions for our businesses to realize their ambition of going global.
Amicable ties
In 2005 Europe became China's largest trade partner. Now that China is retooling its growth pattern, an open and prosperous Europe means this process will be more smooth, while China reduces its dependence on trade.
So at the critical juncture of the debt drama unfolding in Europe, China's capital infusion in IMF is also aimed at cementing the amicable ties built over the years with Europe.
Secondly, China's fund infusions can be interpreted as a choice to diversify its forex reserve portfolio, and to participate in reform of global monetary system at the earliest stage.
Thirdly, China's capital infusion attests to its image as a responsible stakeholder in helping free the world from the economic crisis.
There are several ways to help Europe. One is to lend to Europe via the IMF, whose role resembles that of a nation's central bank during a crisis - lender of last resort. Unless necessary, a central bank doesn't inject funds into the capital market, for unconditional, no-questions-asked bailout carries high moral risks. China's infusion in the IMF is thus the most secure, in that the sums that will be dispensed to indebted eurozone countries are reliant on their eligibility for bailout.
Another means of financial rescue is the ad hoc mechanism established by the EU and European Central Bank (ECB), called EFSF (European Financial Stability Facility), which is basically a mini-IMF formed with funds contributed by eurozone members.
All these contributors stand to benefit from a stable eurozone, so the bailouts they carry out might not be in the best interests of interested outsiders. China isn't involved in this scheme out of concerns that the information asymmetry might hurt its interests.
Another similar rescue option is the EFSM (European Financial Stability Mechanism).
Under those two schemes, most assets are denominated in euros. Therefore, if the ECB steps in to purchase troubled assets, for example, if it launches LTROs (long-term refinancing operations), then creditors' assets will shrink in value. And outside stakeholders like China face higher and more complex risks than do European creditors.
Finally, there is bilateral aid. China can buy bonds issued by Greece and Spain, but apparently this form of rescue will be even riskier than the above-mentioned several means of support in the absence of conditions or scrutiny from the creditors.
To sum up, China's new generosity to IMF signifies its sense of responsibility as a rising power. Meanwhile, the manner in which it made its contributions is also accountable to domestic taxpayers.
The author is executive vice dean of the School of Economics at Fudan University. Shanghai Daily staff writer Ni Tao translated his article from Chinese.
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