By JC Collins
When Christine Lagarde was seeking votes to become the Managing Director of the International Monetary Fund back in 2011, it came as a surprise to many that China supported her nomination. When many expected China to put their own candidate forward, a different strategy was implemented, and China, along with other emerging markets, threw their support behind Lagarde.
After taking the role of Managing Director of the Fund, Lagarde began to promote the implementation of the 2010 Quota and Governance Reforms. These reforms, which have now been enacted by the US Congress, will increase the quota amounts allocated to the emerging markets, such as the BRICS countries. The reforms also restructure the governance board by giving more seats to the emerging markets while taking away from Europe.
Whether these changes will remove the American veto is debatable. The US delays on enacting supporting legislation would suggest a broader multipolar strategy is in play, and deeper changes to how the Fund operates could take place in 2016.
What we do know is that after taking the lead role in 2011, Christine Lagarde also created a 3rd Deputy Director position which was filled by the former Deputy Governor of the People’s Bank of China, Zhu Min.
Zhu Min, who also worked at the World Bank from 1990 to 1996 as an economist, began his term as Deputy Director with the IMF by acting as a Special Advisor to the Managing Director.
It was clear from the onset that the concerns of China, India, and other emerging countries, of having another European serve as the Managing Director of the IMF were addressed behind the scenes. The fact a 3rd Deputy Director position was created immediately after Lagarde took office, and this position was filled by the Deputy Governor of the PBoC, is extremely telling of the strategy which is unfolding.
Confirmation of a broader multilateral strategy is confirmed by the status of Special Advisor to the Managing Director which was given to Zhu Min. Such a close working relationship with Lagarde ensured that Chinese interests would be given the needed priority to implement deeper financial changes in Chinese markets, and increase the liberalization of the renminbi.
It is important to remember that China played a critical role in the original Bretton Woods negotiations which took place back in 1944. Both the IMF and the World Bank were created from these negotiations, but it would be foolish to think that China did not consider the future ramifications of this agreement.
In the post The Bretton Woods Origin of the Cold War, we reviewed how the American delegate Harry Dexter White was responsible for undermining the proposal of John Maynard Keynes to use a global currency called the bancor as the reserve asset. White, who has been accused of being a Soviet spy, betrayed the Russians at Bretton Woods and pushed forward on the idea of using the US dollar as the reserve asset.
China, a representative of the international banking interests even back then, was convinced by the British to allow for the dollar based structure of the Bretton Woods Agreement and forthcoming institutions of the World Bank and IMF. The balance of payments deficits which accumulated against America has now created a situation where the original structure suggested at Bretton Woods can be implemented without much resistance.
China has been involved in the Bretton Woods institutions from inception, but is only now, in the last few years, beginning to move upward within both the World Bank and the IMF. That is why suggestions that China is attempting to overthrow both institutions are foolish and are the conclusions of naïve researchers.
Both institutions were designed to evolve within the multilateral framework which is now developing.
Lagarde’s term as Managing Director ends in July, 2016. It is probable that the Chinese will put forth the name of Zhu Min to replace her. What support this will garner from the rest of the members is difficult to determine with full accuracy. Though the support which has been given to the Asian Infrastructure Investment Bank (AIIB) by American allies could suggest that such a nomination would be openly welcomed.
The changes on the governance board, which will not likely take place until after a new Managing Director has been decided, may not influence the decision. The US veto could still play a role in deciding who the next Managing Director will be.
The legal problems which Lagarde is faced with in her home country of France are somewhat immaterial. Considering the end of her first term is in July, the calls for her to resign will be met with inaction. But they could prevent her from seeking a second term. This would leave the door wide open for Zhu Min, who would be supported by Zhou Xiaochuan, the current Governor of the People’s Bank of China.
Considering the fact that Zhou Xiaochuan has been openly calling for a multilateral monetary framework since at least 2008, my original conclusions were that he would be the next Managing Director of the IMF. After some additional research and reflection on how the Chinese think, it is more likely that Zhou Xiaochuan would support and campaign for the promotion of Zhu Min as the next Managing Director.
Plus, Zhou Xiaochuan has enough to do as an executive board member of the Bank for International Settlements.
There is a possibility that someone from India could become the next Managing Director, but I would conclude that China would covet the first non-European head position of the IMF. This would also support a move of the IMF headquarters from New York to Hong Kong. I do not think Beijing would be a viable option.
Many more changes coming. And the AIIB was officially sanctioned a few days ago. – JC