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Thursday, 23 October 2014

Buying influence

China could gain from helping Europe via IMF

Rescuing the wealthy euro zone is a tough sell for relatively poor China. But the Middle Kingdom could parlay some of its $3.2 trillion of reserves into greater international clout through the International Monetary Fund. It would be saving a big export market and a reserve-diversifying currency into the bargain.

Following the 2008 financial crisis, IMF member states roughly trebled the institution’s lending capacity. But this no longer looks nearly enough. A spree of post-crisis loans has left the fund with only around $400 billion in firepower. That’s about a third of the gross funding needs of Italy and Spain over the coming three years, Barclays Capital reckons. Should it be called upon to play a major role in stabilizing the euro zone, the IMF needs more money - and fast.

The fund’s most obvious potential benefactor, aside from the reluctant European Central Bank, is China. Beijing can perhaps look for inspiration to Saudi Arabia’s accumulation of influence in exchange for cash that began in the mid-1970s. Blessed with surging oil revenue, the Arab nation ratcheted up its contributions to the IMF. That eased resentment over its riches and earned it a much bigger role at the fund.

Saudi still has a 2.8 percent IMF voting share, far larger than its 0.8 percent share of global GDP. China, which is today under-represented at the fund compared with its economic heft, could pull something similar. It might even secure pole position to name the next IMF chief.

Self interest could figure heavily, too. With almost a fifth of its exports going to Europe, China can ill afford an economic meltdown in the euro zone. Helping to bankroll the continued existence of the euro would also ensure China had access to a reserve currency other than the dollar. Funding the IMF is also pretty safe - its loans to debtor nations tend to get repaid ahead of anyone else’s.

Even done indirectly via the IMF, there’s still the question of why a nation with some 250 million people living in poverty should bail Europe out when much richer Germany, for instance, isn’t doing so. But aside from feeding China’s growing geopolitical ego, it could make sense. If the euro zone crumbles, pulling more of those people toward affluence would surely become much harder.

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The International Monetary Fund has around $400 billion in remaining lending capacity, according to data from the Washington-based lender.

The gross funding needs of Italy and Spain over the next three years are 963 billion euros, or about $1.3 trillion, according to Barclays Capital.

China had foreign exchange reserves of $3.2 trillion at the end of September, according to the People’s Bank of China. According to the Center for Global Development, around 250 million Chinese were living on less than the equivalent of $2 a day in 2009.

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