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Shifts in financial power play

By Liu Junhong (China Daily)
Updated: 2009-09-23 08:23

Competition among countries for greater international financial power is expected to become fiercer although G20 finance ministers reiterated in London their commitment to coordinated action for tackling the economic crisis and agreed on the need for a tougher financial monitoring system.

The latest G20 summit in Pittsburgh will likely be dominated by new contests in three areas: financial regulatory system reform, capital adequacy ratio of financial institutions and the contribution ratio to the International Monetary Fund (IMF).

In early June, US President Barack Obama first put forward a program to reform the financial regulatory system, emphasizing the importance of maintaining the stability of the financial system and establishing the central bank's potent monitoring authority. In response, the European Union has also actively pushed for the building of a central bank monitoring system covering the whole region, in an attempt to contend with Washington for a larger say in reconstructing the collapsed global financial order. Meanwhile, Japan, a country that has long advocated a dominant government role in this aspect, appears reluctant to abandon the government's financial monitoring role. Instead, it has proposed to maintain an independent financial policy among different countries and keep intact the existing financial monitoring system.

In fact, the unitary central bank monitoring formula proposed by the US will result in the collapse of the long-established monitoring mechanism respectively enforced by banking, security and insurance agencies. The US also advocates setting up a coordinated monitoring system between its central bank and the Department of Treasury to maintain the absolute authority of the dollar. Accepting the US model means that Japan would completely overturn its domestic financial establishments put in place since the late 1990s. Japan has set up an independent central bank as far as financial monitoring is concerned. At the same time, the world's second largest economy has also set up a multiple monitoring mechanism by non-governmental bank, security and insurance industrial associations.

In the run-up to the G20 summit in Pittsburgh, the US and European countries have also successively floated their proposals on increasing the ratio of financial bodies' self-owned capital ratio. They have also advocated revising the Basel Concordat to increase the Capital Adequacy Ratio of those financial agencies engaging in international financial business from the current 8 percent to 12 percent. The reason, they cited, is that the ongoing global financial crisis has exposed capital insufficiency-induced defects of financial bodies in countries throughout the world. Especially, the application for government assistances by Bear Stearns and American International Group in the wake of the outbreak of the US mortgage crisis and the collapse of Lehman Brothers are explicit indications of the potential risks brought about by capital insufficiency. However, Japan thinks otherwise. Tokyo holds that the injection of government funds by the US and European countries into their financial bodies during the crisis will lead to an increased proportion of government capital. This is not what Japan wants to see, given that the over-stretched Japanese financial bodies have long clung on to the low-cost competition strategy and they have not received government fund injection after the crisis broke out. Also, the government needs a nod from the Diet for its fund injection into banks, which, however, would be extremely difficult in the power transition under way in Japan. Consequently, it is no surprise that the Japanese government and central bank officials have expressed opposition to the US and European financial formulas.

Related readings:  The absurdity of global financial reform  Finance ministers leave long to-do list for G20 leaders  G20 summit should keep global recovery continuing  BRIC building road to global economic recovery  Boost to IMF reform

Prior to the G20 finance ministers' meeting in London, finance ministers of BRIC (Brazil, Russia, India And China) held a meeting where they proposed increasing their fund contribution ratio in the IMF to ensure that their say is commensurate with their gross domestic product. US Treasury Secretary Timothy F. Geithner attended the meeting as an observer and extended his support for a larger voice to emerging economies in the international body. At the same time, Geithner proposed that the EU concede part of its power to emerging economies, a proposal strongly opposed by the European bloc.

Given that the IMF has been one of the US' major instruments in managing the world economic order in the post-WWII period, Washington would by no means easily give up its absolute dominant status in the IMF to emerging economies.

It is well known that the IMF laid down an important principle since its establishment in 1945, i.e. any of its major decisions would become effective only after gaining at least 85 percent of the votes. The original 17 percent of voting power of the US decides that Washington essentially enjoys a veto against any move by the financial body. However, with the emergence of the EU and the euro, European countries have raised their fund proportions in the IMF to 19.458 percent, and surpassed the US level. With the expansion of EU membership, European countries are expected to exceed the US' 20.386 percent fund scale in the North American Free Trade Agreement region.

For the US, the most pressing task is to reduce the EU's capital proportion in international financial bodies in a bid to maintain its long-established advantages. One of the effective ways to this end, in the eyes of the US, is to force the EU to hand over part of its power to emerging economies.

Since the end of the Cold War, the West no longer completely used ideology to classify world countries. And China, with its rising status, has been described as a shareholder of the US. However, the question is, does the world superpower really wants to extend to China a fund proportion in the international financial body in accordance with its national strength, and then proportionately improve the Asian country's voting power?

The author is a researcher with China Institutes of Contemporary International Relations.