Author: Priyanka Pandit, ICWA
On the 75th anniversary of the Bretton Woods Agreement this year, French Finance Minister Bruno Le Maire called for a rethink of China’s role in the global financial system. Talking about Bretton Woods reform, Le Maire argued that ‘the Bretton Woods order as we know it has reached its limits’ and that ‘unless we are able to reinvent Bretton Woods, the New Silk Roads might become the new world order’. These developments beg the question, does China need Bretton Woods?
The Bretton Woods system came into place as an arrangement aimed at reconstructing a world economy affected by trade war and the Great Depression. Its central institutions — the IMF and World Bank — have made significant contributions to the global economic agenda and helped secure a stable international financial system.
Although these institutions have undergone changes in order to adapt to new global economic realities, the liberal economic principles they espouse and the Anglo-American hegemony they represent have come under severe strain since the 2008 global financial crisis. This crisis of legitimacy is exposing the limitations of Bretton Woods and its ability to cope with the rapidly changing realities of the world.
These developments have coincided with the rise of China in the global economic system. Beijing’s rise became more pronounced after it began to initiate multilateral entities like the Asian Infrastructure Investment Bank (AIIB), as well as the New Development Bank and the Contingency Reserve Arrangement (CRA) in collaboration with the BRICS emerging economies. This generated speculation about China’s global economic intentions and the efficacy of the Bretton Woods system in general.
Bretton Woods does require major reform of its governance structure. The reform package, which came into effect on 26 January 2016 after a five year delay, failed to line up with the demands proposed by developing countries. The increase in quota and voting shares were disproportionate to the GDP shares of the emerging economies, to which China belongs.
China’s relationship with Bretton Woods is complex. Since the second half of the 20th century, China has emerged as a reliable borrower and constructive partner in the Bretton Woods order. Beijing depends on the World Bank not only for access to the below-market interest rate loans that it receives for funding infrastructure projects. It also gives China access to international experts across a range of sectors, including those experts who help conduct feasibility studies for proposed Chinese projects.
Newly created institutions like the AIIB depend on international capital markets and are dollar-denominated entities. Some of the clauses that relate to their lending arrangements are similar to those that exist in arrangements with the World Bank and the IMF. The World Bank remains one of the main financing partners for the AIIB. This way, the AIIB can pass on the expensive task of project evaluation and evades the risk of being the main financier. What sets these new financial instruments apart is their project-centred focus, their reluctance to play an advisory role to the borrowers and their adherence to a principle of non-interference in borrowing countries’ domestic economic policies.
It would be misleading to label these new entities ‘alternatives’ to Bretton Woods institutions. China’s leadership in these new bodies by no means indicates that China or the BRICS economies will leave the World Bank or the IMF. Beijing has pushed hard for its currency to be included in the IMF’s special drawing rights. Since the start of this push, there have been no major instances of renminbi manipulation by Beijing, not even at the peak of the ongoing US–China trade war. China’s contribution to the World Bank has also increased in the last two years.
China’s capital market liberalisation is far from complete. It is struggling to implement recommendations from the World Bank on the reform of its state-owned enterprises. Despite the weakness of the Bretton Woods institutions, Beijing still depends on them for advanced methods and techniques in financial governance. It will find it very difficult to forge high international standards and transparency in the governance of these new institutions.
The 15th quota review deadline of the IMF is nearing. It is uncertain whether the United States will support a substantial increase in IMF quotas and sure up financial resources. Given the Trump administration’s shift away from multilateral organisations, China’s role is crucial. The IMF’s liquidity for the next decade will be largely dependent on China’s voluntary contribution to the pool, irrespective of its quota share.
The IMF being vital to advancing Washington’s interests, it is highly unlikely that the United States will give up its veto power in the organisation. The choice lies with other major countries and hinges on whether they are willing to come together with China to revive Bretton Woods, to make it more representative and to do so by placing pressure on Washington to re-distribute quota shares and voting rights. No matter how this international financial diplomacy plays out in the near term, China remains an indispensable partner in the reform of global economic governance.
Dr Priyanka Pandit is a Research Fellow at the Indian Council of World Affairs, New Delhi.