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On Nov. 30, the Chinese yuan will join the dollar, euro, pound and yen as the world’s official reserve currencies, as recommended by the International Monetary Fund. What this heralds is the amplification of extreme uneven development and the abuse of Chinese economic surpluses, yet again, for the purpose of bailing out a corrupt, fragile world financial system.
Aside from the IMF itself, the driver appears to be the People’s Bank of China, which needs a new name now: the Western Bankers’ Bank of China. Its official statement claimed “a win-win result for China and the world.”
But here, the name “China” really means the neoliberal clique at the helm of Beijing’s economic management, and the “world” means a very shaky capitalism suffering periodic spasms in its hyper-speculative financial centers. For the last fifteen years, these centers have enjoyed a Washington backstop that was the beneficiary of Chinese official purchases of US Treasury Bills. Reaching $1.3 trillion in late 2013, that process has finally reversed, with about $100 billion in net T-Bill sales since then. But Beijing still holds about a third of its foreign reserves in these investments, representing more than a fifth of all foreign US T-Bill holdings (in turn, the $6 trillion in US T-Bills is about a third of total US foreign indebtedness – an amount so vast it can only be repaid by running the Fed printing press).
Beijing is mindful of homegrown economic problems, including its own vast overindebtedness, the secondary cities’ real estate meltdown and the $3.5 trillion collapse of the main stock markets mid-year. If London bankers are correct, when the IMF welcomes the yuan, an additional $1 trillion of global reserves could move into Chinese financial assets. That would negate Beijing’s August 2015 2 percent currency devaluation and make the whole system more balanced at surface level, yet far more chaotic underneath as a result of international contagion from a future Chinese debt crisis. Meantime, China will probably bolster the IMF’s own loan-pushing in its new self-interested currency partnership.
Is there an alternative, an opting-out of the financial death grip between China and the West? And for the other BRICS, is there a way to support the Bank of the South (which without Brazil’s support appears stillborn), or to default on ‘Odious Debt’ (as did Ecuador in 2009), or to impose tough exchange controls (as did Malaysia to halt capital flight in 1998), or to insist that state regulators get control of local financiers rather than the other way around?
Aside from Russia, facing partial Western financial sanctions, apparently not, what with the neoliberal financial officials now in place. To illustrate, at its founding the BRICS Contingent Reserve Arrangement (CRA) was designed so the IMF gets stronger, the more quickly and desperately BRICS borrowers need a bailout loan. The CRA articles of agreement compel the borrower to visit Washington for an IMF structural adjustment loan after drawing down just 30 percent of their quota in the supposedly “alternative” institutions.
Just after the BRICS CRA became operational in late September, Barack Obama’s statement during Chinese leader Xi Jinping’s visit confirmed the game in play: “China has a strong stake in the maintenance and further strengthening and modernization of global financial institutions, and the United States welcomes China's growing contributions to financing development and infrastructure in Asia and beyond.”
On the defensive after Washington was outmanoeuvred on this front earlier in the year – when Beijing’s Asian Infrastructure Investment Bank received European and Bretton Woods Institutions’ support – Obama told his guest, “The United States commits to implement the 2010 IMF quota and governance reforms as soon as possible and reaffirms that the distribution of quotas should continue to shift toward dynamic emerging markets and developing countries.”
Republican members of the US Congress have for five years blocked that move, due to their worry about declining power at the IMF, even with minimal shrinkage (from 17 percent to 16.5 percent of voting shares). Obama has protected the US veto by not letting his delegate’s voting quota fall below 15 percent.
The argument for IMF vote rejigging comes mainly from the countries that gain votes once the 2010 deal is implemented: China +37 percent, Brazil +23 percent, India +11 percent, and Russia +8 percent. (South Africa loses out, as Pretoria’s share would fall 21 percent under the 2010 terms.)
Which countries, then, lose the most voting power if the 2010 deal is implemented, as Obama promised? Amongst them are the delegates representing these South countries: Nigeria -41 percent, Venezuela -41 percent, Libya -39 percent, Sri Lanka -34 percent, Uruguay -32 percent, Argentina -31 percent, Jamaica -31 percent, Morocco -27 percent, Gabon -26 percent, Algeria -26 percent, Bolivia -26 percent, Namibia -26 percent. (Belgium, Kuwait, Saudi Arabia and New Zealand also retreat significantly in IMF voting power.) So much for the BRICS South-South solidarity.
In return, said Obama, “The United States supports China’s presidency of the G-20 in 2016.” After all, Beijing will also “promote international trade and investment as engines of global growth,” even if left out of Obama’s trade deals.
More realistically, China will be the engine of global crisis. Though not always trustworthy, the Ronald Reagan regime’s former Budget Director and subsequent Wall Street financier David Stockman is appropriately scathing about China’s overaccumulation of capital: “In the process of taking its debt from $2 trillion in the year 2000 to $28 trillion at present, in fact, China has erected an endless string of uneconomic public facilities and industrial white elephants that boggle the mind. For instance, it has 1.1 billion tons of steel capacity: 400-500 million tons more than its domestic economy will ever be able to use on a sustained, sell-through basis.”
For this reason, the world’s most frivolous investors, notorious for fad acronyms and investor churning, have just abandoned the BRICS: Goldman Sachs. On November 8, the bank that brought the world to the edge of the financial cliff after gaming US home mortgages and other “toxics,” closed its main BRIC (i.e. minus South Africa) investment fund. Its peak valuation of $842 million in 2010 was reduced by 88 percent in value to $98 million. Over the same period, $15 billion was withdrawn from the four economies by Goldman and other investors.
In this context the IMF’s assimilation of the yuan helps prepare world financial markets for the next version of 2008-13 Federal Reserve ‘Quantitative Easing’ and 2009-style IMF Special Drawing Rights bailouts. If in coming months recessionary winds howl, as expected, it appears the BRICS and especially China will blow even harder to keep the West’s financial house of cards standing.
They shouldn’t, but the power balance within the BRICS today seems to dictate a sub-imperialist stance in relation to global finance instead of an anti-imperialist one. (The two men the Pretoria regime just deployed to co-direct the BRICS New Development Bank in Shanghai go there from high-paid jobs at, you guessed it, Goldman Sachs-Johannesburg.)
Far better would be to turn the BRICS finance ministries and central banks over to activists trained by the current wave of student #FeesMustFall protests, European struggles against austerity, Occupy, debt cancellation advocacy and the Third World’s thousands of IMF Riots the last third of a century. Sure, we don’t yet deserve those gigs – because our counter-power has repeatedly risen and then rapidly shriveled during the neoliberal era’s contestations against corporate and banking elites. But one day we must go for it.
Patrick Bond is a political economy professor at the Universities of the Witwatersrand in Johannesburg and KwaZulu-Natal in Durban.
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