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The G7 and China in the Management of the International Financial System

Professor John Kirton
Department of Political Science
Centre for International Studies
University of Toronto

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4. The Move Toward Meaningful Association: From G22 to FSF and G20

This shifting conception of China among G7 and G8 leaders has been accompanied by concrete moves to bring China into a closer institutionalized relationship as an associate of the G7. Spawned initially by China's new financial power, and hastened by its responsible role in the 1997-9 Asian and global financial crisis, such a movement has been centered on, and thus far confined to, an association in the field of finance, and at the level of finance ministers and central bank governors

 

a. The Early Associations

The move toward China's institutionalized association with G7 dominated finance forums began in the late 1990's with the creation of the New Arrangements to Borrow (NAB), in which Hong Kong is involved. The NAB, whose creation was prompted by the December 1994 Mexican peso crisis and the Halifax G-7 call to the G-10 to double the monies available to the IMF under the General Arrangements to Borrow (GAB), was approved by the IMF Executive Board on January 27, 1997 and entered into force on November 17, 1998. The NAB, whose secretary is housed at the IMF, is similar to the longstanding GAB, but brings to bear more funds and additional contributors (Bergsten and Henning 1996). Both were used during the crisis. The fact that the NAB had more money and more flexibility than the GAB proved essential in the successful containment of the crisis. The Hong Kong Monetary Authority, one of the 25 members of the NAB, has a contribution of 340 million SDR's, which puts it on a par with Finland, Korea, Malaysia, Singapore and Thailand at the lowest level of contribution. Canada, the lowest-ranked G7 member in the NAB has 1,396 SDR's while the USA, the top-ranked G7 member, has 6,712.

A further step came with the formation of the Group of 22, created at the initiative of President Clinton at the November 1997 APEC leaders' meeting in Vancouver. China participated as a member in the Group's activities over the subsequent year, centered on reports on particular aspects of the financial architecture. The activities of the Group proved instrumental in the creation of the new G20, as a successor body more closely integrated with the work of the established international financial institutions. The experience with the G22 and parallel G33 had highlighted the need "for a regular international consultative forum with a broader membership than the G-7" and one integrated into the governance structures of the IMF or World Bank (Canada 1999).

A subsequent step came in the spring of 1999 with the creation by the G7 Finance Ministers in Bonn on February 22, 1999, based on a formula composed by German central bank governor Hans Tietmeyer, of a new Financial Stability Forum. The Forum's purpose is to "promote information exchange and coordination among the national authorities, international institutions and international regulatory or experts groupings with responsibilities for questions of international financial stability" (Financial Stability Forum 1999). Its initial membership consisted of the finance ministries, central banks and leading regulators of each of the G-7 countries, along with the chairs of the international regulatory organizations and representatives of international financial institutions.

The Forum first met at the IMF in Washington on April 14, 1999. At the Cologne Summit in June 1999, G7 leaders decided to expand the group beyond G7 member countries to include the "systemically important emerging economies." Thus Hong Kong, Singapore, Australia and the Netherlands were added as participants for the Forum's subsequent meeting in Paris on September 15, 1999.

 

b. The G20

The most recent advance that China has made in securing association with the G7 and recognition of its strong relevance in the redesign of the international financial system has been in its inclusion as a founding member of the new Group of Twenty (G20) forum of finance ministers and central bank governors. The G20, chaired for its first two years by Canadian Finance Minister Paul Martin was formally created at the September 25, 1999 meeting of the G7 Finance Ministers. It was created "as a new mechanism for informal dialogue in the framework of the Bretton Woods institutional system, to broaden the dialogue on key economic and financial policy issues among systemically significant economies and to promote cooperation to achieve stable and sustainable world growth that benefits all" (G7 1999). To launch the G20 at its first meeting in Berlin in December 1999, the G7 finance ministers would thus invite "counterparts from a number of systemically important countries from regions around the world," as well as representative of the EU, IMF and World Bank.

The G20, from its initial formulation as the GX to its September birth, was the product of different approaches among G7 members. These will determine in part how the new body evolves. The French, supported by the Italians, were opposed to the very creation of the G20, for fear that it would undermine the authority of the IMF, which their compatriot Michel Camdessus headed, and the new International and Monetary Financial Committee which they preferred. The USA and Japan were very much in favour of the new body. Britain, while supportive, was somewhat reserved, for fear that the G20 might undercut in practice the prominence of the new International and Monetary Financial Committee, which Britain's finance minister George Brown was chosen to initially chair. Their early emphasis was on restricting the discussions to be held within the new body. Canada was supportive, in part because it wished to see a broader consultative structure that was more formalized, linked to other institutions, and less controlled by the USA and its preferences than it perceived the G22 to have been.

As outlined by its Canadian chair, the G20 "fulfills the commitment by G-7 leaders at the June 1999 Summit at Koln "...to establish an informal mechanism for dialogue among systemically important countries within the framework of the Bretton Woods institutional system" (Canada 1999). Its mandate is to "promote discussion and study and review policy issues among industrialized countries and emerging markets with a view to promoting international financial stability." Its initial 18 country members consisted, in addition to the G7, of Argentina, Australia, Brazil, China, India, Mexico, Russia, Saudi Arabia, South Africa, South Korea, and Turkey. Canada would host the second meeting in 2000. The chair would rotate among participants with two year terms, and with the initial chairs being chosen from among the G-7 countries.

Through the inclusion of China, the G7 recognized China as a "systemically important country," a "key emerging market" with a different viewpoint than that of the most industrialized countries, and a representative of the Asian region.

It shared the former status with ten other countries (including G8 member Russia), and the latter with fellow Asian region countries Australia, India, and South Korea. One of two unfilled country positions was reserved for Indonesia, which would be awarded it once and if its stable democratic transition were completed and current G7 concerns about its political and human rights abuses ended. While other Asian countries, notably Malaysia, were claiming a place, some among the G7 felt that Asian countries such as Thailand would, on the grounds of size and the absence of currency controls, be better suited. The pattern of membership thus constituted a recognition that in this financial forum, China was in the same class as Russia, and in one above that of Indonesia and Malaysia.

Yet in the diplomacy designing the new institution, China clearly had pride of place. During this process there was never any serious consideration of excluding China from the group. They were seen to rank above Argentina, Mexico, Korea, Turkey, and as a country that might some day overtake Canada and Italy. While there was much discussion about membership, no-one's list excluded China. In contrast, some lists excluded Australia, Korea, Turkey, and Saudi Arabia (although the latter's provision of ample funding proved decisive in the end).

The functions of the group suggested an even broader relevance for China. To be sure, the G20 was a deliberative rather than decisional body, but one designed to encourage 'the formation of consensus" on international issues" (Canada 1999). However it was one with a policy focus, a mandate to promote international financial stability. Chair Paul Martin suggested it "will focus on translating the benefits of globalization into higher incomes and better opportunities everywhere," including working people around the world (Beattle 1999). Although concentrating on longer term rather than immediate policy issues, Martin declared;" There is virtually no major aspect of the global economy or international financial system that will be outside of the group's purview." (Beauchesne 1999).

Its relationship with other bodies also suggested a robust role for its members. It would operate within the framework of the Bretton Woods institutions, involve their representatives (including the Chair of the Interim and Development Committees) and the EU fully in its substantive discussions, in order to ensure that its work was "well integrated." It would "help co-ordinate the activities of other international groups and organizations, such as the Financial Stability Forum", "facilitate deliberations in the new International and Monetary Financial Committee, and potentially develop "common positions on complex issues...to expedite decisionmaking in other fora."

Its potential importance was further suggested by its institutional characteristics. These included the firm control of the chair by the G7, the two year rotational cycle, the linkage of its meetings to those of the G-7 meetings at the start of each year, the presence of a deputies process to prepare for and support the meetings, its ability to call on the resources of the IMF, World Bank and outside experts, and its ability to "form working parties to examine and make recommendations on issues related to its mandate."

The early emphases by the Canadian chair suggested an effort to turn the new institution into an influential forum. The Canadians envisaged the possibility of holding the second ministerial meeting in June 2000, a mere six months after the first. They further contemplated holding it in Toronto, despite fears that this could detract from the lead-up to the G7 finance ministers meeting and G7/G8 Summit in Japan in July. The Canadian hoped that the timing and location would better enable the new Group, whose conclusions could be recorded in a Chair's Statement, to influence the G7/G8 meeting itself.

Substantively, the central Canadian objective was to avoid having the body generate the traditional north-south divide. Canada thus wanted to keep the Group focused on sharing experiences, and open discussion, rather than the statement of hard positions. Their emphasis was heightened by the views of some, such as another newly included finance minister, who saw the new Group as an excellent opportunity for the "South" to press its issues against the "North".

China proved ready to join the new Group, in part due to the G7's and Paul Martin's desire to use it to promote for better supervisory and self regulation arrangements. It was clear that China would be dealing from a position of strength in the new G20. It should quickly emerge as one of the most influential members, and advocate of a distinctive approach, within the club. With US$150 billion in foreign exchange reserves, second only to Japan in the world, it would come with a position of domestic strength. That strength also would give it a particular perspective on managing the international financial system, generating a bias in favour of fixed exchange rates backed by currency intervention. An open question for G7 members, however, was whether in the area of trade in financial services, such as banking and insurance, China would be ready to recognize the need for a process of international participation on a fair basis over time, rather than one which sequestered the best part of its growing domestic market for domestic firms.

There are, however, legitimate questions as to whether this new involvement on the part of China in this fledgling Group constitutes a sufficient degree and form of institutionalized association with the G7. One doubt arises from the view of some who see the G20 as part of the "G7-ization" of the world. In this view, the G20 was born to legitimate G7 initiatives to the wider world, by securing a broader consensus for G7-generated ideas. The G20's eleven non-G7 members are thus destined to affect issues merely on the margin, to be informed of G7 initiatives, and to be given some semblance of participation. The G20 underscores the fact that the G7 does not want to leave the reform of the international financial system to the IMF or World Bank, where developing countries have an institutionalized role.

A second doubt arises from the known difficulties of China being positioned merely as a full member of other developing country groupings - in this case, the eleven emerging economies (minus the one Australian exception) that join with the G7 to constitute the 18 member G20. Although China is a full member of the IMF's mixed membership Interim Committee and Development Committee, it is only an observer at the exclusively developing country clubs of the G24 meetings, and, outside the Bretton Woods system, at the G77. This mutually beneficial arrangement arises from the fact that China does not want to be fully linked to a group, given that it sees itself as a group unto itself. In addition, such groups are reluctant to have China as a full member for fear that its exceptional size would lead it to dominate.

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