For the rest of the world, the most interesting question about China's rise is what that country will do with the world economy when it gets its hands on it. A dramatic speech in Chicago recently by a well-connected Chinese economist indicated that Beijing has been asking the same question and has some interesting answers.
Most China-watchers had assumed that once China takes its place as the world's richest nation, it will approach the existing global economic institutions -- the International Monetary Fund, the World Bank, the World Trade Organization and the rest -- in one of two ways:
- It will use its economic power to shut them down, and set up new institutions answering to its needs. After all, the institutions were originally created by the U.S. and its Western allies, which had the economic power at that time, to answer their needs, so it's only logical that China would do the same.
- It will keep those institutions functioning as they do now. After all, China has risen to economic power within the existing Western-created system, has pretty much played by the existing rules and would see no reason to change a structure that has served it so well.
Wrong both times, according to Xu Hongcai, a Chinese economist, a veteran officer in both Chinese companies and government, and now with the China Center for International Economic Exchanges, which deals with China's position in the world economy. Xu came here recently to speak to a conference at Northwestern University pegged to summits, like the G8 and NATO summits in May, and their impact.
According to Xu, China favors keeping the IMF, World Bank and other institutions. But it wants to make them much more powerful and give them more control over the global economy: for instance, the IMF would become the world's central bank. In addition, the big emerging countries -- especially China -- would play a bigger role, have a bigger vote and wield more power within the institutions.
In other words, China expects to use the institutions created by the West to reduce Western power and increase its own clout.
(As you've seen, most of this blog is about Chinese thinking, not about the Midwest. But every Midwesterner knows by now that what China does can affect local economies. If China has plans to reform the global economy, it behooves everyone, from London to Sao Paulo to Des Moines, to pay attention.)
It's possible that Hu was only using his Chicago platform to do a little free-lance theorizing, pushing his own agenda, not that of the Chinese leadership. Hu told me that his ideas are not official policy yet but reflect the trend of thought in Beijing. Other, non-Chinese, China experts confirmed this.
Xu didn't talk about the United Nations and its agencies, also postwar creations of a Western-dominated world. But it's reasonable to assume that his plans for these bodies may be the same.
Xu began by talking about the G20, the group of 20 leading economies -- the U.S. and the rest of the G8, plus China, India and the other emerging countries. The G20, which is to hold its own summit in Mexico in June, was originally seen as a worthy and useful successor to the G8 as the forum where the economically important nations meet.
Xu didn't agree. The G20, he said, has become a talk shop -- he compared it to the U.N. -- with too many members, not all of whom belong there, and low efficiency.
A true purpose for the G20, he said, would be to reform the global monetary system. He suggested the G20 set up a full office inside the IMF and reform it from within.
The IMF would become the world's central bank, Xu said. Since central banks traditionally oversee a nation's currency, control its money supply, set its interest rates and act as lender of last resort, this would mean a vastly expanded role for the Washington-based Fund. Originally set up to help stabilize currency exchange rates and help nations overcome currency crises, it now operates more as a global think tank, encouraging certain economic policies but lacking much power to enforce its advice.
If the IMF were to become the world's central bank, as Xu suggested, that implies a single world currency. As the European Union has discovered, a group of nations using a single currency need a unified fiscal policy, if not a single government.
Xu's thinking seems to be halfway there. The single currency would be the Special Drawing Right, or SDR, which exists now but has limited use. The SDR's value reflects a "basket" of national currencies. The U.S. dollar carries the most weight in the current "basket," followed by the euro, the Japanese yen, and British pound. The Chinese yuan isn't included.
There's no such thing as a SDR that you can put in your pocket. Rather, it's an accounting unit that can be used internationally to settle debts across borders, often between governments. International economists know all about it but, at the moment, nobody else needs to.
Xu said a new SDR should reflect a new basket containing the dollar, euro and yuan, but also the currencies of other emerging nations. He said the SDR should be used more widely, but didn't say whether it should be a normal, every-day currency.
Voting power in the IMF, like the weighting of the SDR basket, goes to the biggest and strongest economies. Xu clearly sees a much expanded role for China in this new reformed IMF.
This new IMF, he said, should oversee the SDR as a world reserve currency, with some control over other reserve currencies, like the dollar. It should also control bailouts of nations that fall into financial crises: since it already does this in some crises, the implication is that this process would continue, but with increased G20 -- especially Chinese -- oversight.
Under Xu's plan, another world financial institution, the Basel-based Bank for International Settlements, would become an early-warning center for financial risk, signaling when a country is headed for trouble, as the U.S. was during the sub-prime mortgage boom. The BIS now sets rules for international banking: since most financial crises are basically banking crises, the BIS would seem to be well placed to take on this new role.
In sum, what Xu seemed to be saying is this:
China has joined the global economy and the global financial structure, and doesn't like them very much. It will keep the institutions, but reform them. The reform will be aimed at making them work better but, mostly, to increase Chinese power within them.