Financial Regulatory Forum

China wants IMF to fix world monetary system, U.S. sees surveillance role

By Reuters Staff
October 6, 2009

By Simon Rabinovitch and David Lawder
ISTANBUL, Oct 6 (Reuters) – The IMF needs to fix “intrinsic defects” in the world’s monetary system, China said on Tuesday as officials from around the globe wrestled with how best to ward off future financial crises.

The International Monetary Fund should aim to “provide a stable monetary environment for global growth and financial stability,” Chinese Finance Minister Xie Xuren told finance chiefs at the IMF and World Bank’s semiannual meeting.

China’s views were just part of a wide-ranging and difficult debate among nations about the future of the global economic system that produced consensus on the need for change but disagreement on specific steps.

“The old order is gone. We should not waste our time and tears lamenting it. Today we must build anew,” said World Bank President Robert Zoellick.

A large and unsustainable run-up in home prices in the United States and some other developed economies, fueled by cheap credit from export powerhouse China, laid the ground for the worst financial crisis since the 1930s.

Now, officials are trying to join hands to “rebalance” the world economy to prevent future financial disasters.

U.S. Treasury Secretary Timothy Geithner called on the IMF to provide rigorous surveillance to spot new asset bubbles and keep country foreign exchange policies in line with the rebalancing goal.

“The IMF will need to be a truth-teller,” Geithner said in remarks a deputy delivered to the meeting.

Trying to do just that, IMF Managing Director Dominique Strauss-Kahn told major exporting nations that they may have to shoulder the burden of a global rebalancing.

While excessive, debt-fuelled spending by U.S. consumers helped trigger the crisis, Strauss-Kahn noted that U.S. households had sharply increase their saving lately and said a new frugality could be taking hold.

“In such a scenario, the responsibility for powering the global growth engine will fall on other countries, particularly those that relied in export-led growth. Making this transition will not be easy,” he said.

BIGGER IMF
Bankers, policymakers and economists have called on the IMF to assume a bigger role in managing the global economy and directing reforms to avoid a recurrence of the crisis that ravaged rich and poor nations alike over the past year.

The IMF is evolving into a “central clearing house for information, for liquidity, for coordination,” Youssef Boutros-Ghali, the head of the Fund’s policy-steering committee, told Reuters on Monday.

The financial crisis forced hard-hit countries to turn to the Fund for help, and the IMF has asked member countries to greatly increase its resources so it can play an enhanced lender of last resort role when trouble strikes in the future.

“The founders of the IMF envisaged this global lender of last resort role for the IMF, but our resources are currently limited relative to the precautionary demand for reserves,” Strauss-Kahn said on Tuesday.

But enthusiasm for the IMF still has sharp limitations.

German central bank chief Axel Weber said the Fund’s growing clout should be kept in check, because nations could take undue risks if they think the IMF will always save them.

“Just as a sustained economic recovery will call for an unwinding of exceptional policy support, so the Fund should eventually prepare the ‘exit’ from its exceptional resources,” he said.

BIG ECONOMIES
For all the questions about the IMF’s role, the meeting did not lose sight of the simple fact that the world’s biggest economies remained in the drivers’ seat in steering the global economy.

“Countries of systemic importance should act responsibly and take the necessary steps to timely mitigate their economic imbalances,” Turkish Economy Minister Ali Babacan said.

The linchpins of global rebalancing are the United States, with huge trade and budget deficits, and China with its large trade surplus and massive foreign exchange reserves. The IMF has said China’s yuan currency is undervalued, and critics claim this gives Beijing a big edge in export markets.

China, which has invested the vast bulk of its $2 trillion reserves in U.S. dollar assets, called for the IMF to stabilise the exchange rates of major reserve currencies, although it did not directly mention the dollar.

The potential for rough waters in financial markets as discussion about reforms heats up was illustrated by jittery reactions to a British newspaper report that Gulf Arab states were in secret talks to replace the dollar with a basket of currencies in trading oil. Big oil producing nations strongly denied the report.

Geithner said the international community recognized that the world cannot return to its over-reliance on a single engine of consumption-led growth. “First and foremost, the responsibility for tackling these problems rests with sovereign governments, including my own” he said.

(Additional reporting by Lesley Wrougton; Editing by Tim Ahmann)
((simon.rabinovitch@thomsonreuters.com; +86 139 0111 6692; Reuters Messaging: simon.rabinovitch.reuters.com@reuters.net))

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