Written by Laurence Brahm - Published by South China Morning Post on 10/19/2004

When the G7 invited China’s central bank governor, Zhou Xiaochuan, and Finance Minister Jin Renqing to a formal dinner during annual meetings with the International Monetary Fund and the World Bank in Washington this month, both felt honored.

This was the first time the grouping had invited China into the “rich nations’ club.” Participating in “informal dialogue” seemed inviting, until the two men realized the meaning of the saying: “there’s no such thing as a free lunch.” America, as host, had arranged the meeting to exert pressure on China to revalue the yuan exchange rate.

It is amazing how the IMF and the World Bank still adhere to elements which were disastrously applied in the former Soviet Union, repeated blindly in Indonesia during the Asian financial crisis, and which have wrecked havoc on Latin America and Africa.

But by saying no to the demands, China championed the developing world consensus, which seeks pragmatic alternatives to Washington’s fundamentalism. China has developed its own model, rejecting failed IMF and World Bank theories. The developing world can do without Washington’s fanatically espoused economic and political theories.

Mr Zhou patiently reasoned with his counterparts, saying: “China is a large nation, and exchange rate policy is a complicated matter. You cannot blame us for being careful. Moreover, we are actively working toward exchange regime reforms.” But it is not a simple matter, he explained, adding that China must act responsibly towards its Asian neighbors.

US Treasury Secretary John Snow expressed frustration with China, demanding that it change its ways “as soon as possible.”

Mr Zhou countered by saying that foreign exchange regime liberalization was conditional on economic and financial stability, and was not simply a question of time schedules.

China seeks to complete and institutionalized exchange rate regime, capable of maintaining the yuan within a balanced, rational and fundamentally stable rate (determined by supply and demand). Beijing may not need to maintain high current account surpluses and foreign exchange reserves when more sophisticated systems can be to limit the risks and shocks from sudden international exchange fluctuations. Such systems require a capital market infrastructure, which cannot be created overnight. Simply adjusting exchange rates under political pressure does not contribute to this process.

According to the World Bank, China is now the world’s second-largest contributor to world-growth after America (based on purchasing power parity), with trade growth ranking third behind America and Japan. Last year, China received more foreign direct investment than any other country. American Treasury Undersecretary John Taylor said that it was “very natural” to invite China’s participation in the G7.

“Without China, it will be very difficult to determine many of the world’s macroeconomic policies,” said Mr Jin.

But China’s participation may not fit America’s agenda. Beijing is developing a model for long-term sustainable development and risk maintenance. Washington is still dictating politically motivated shock therapy, which disregards the necessity of establishing the requisite infrastructure to maintain stability. The two approaches are diametrically opposed.

Developing nations look to China’s model as a balanced alternative to Washington’s ideologically driven policies. “Our yuan currency stability not only benefits Asia, but also development of the world economy,” said Mr Jin. That is to say, sustained global economic development requires a relatively stable international currency environment.

Laurence Brahm is a global activist, international mediator, political columnist and author. He is the leading advocate of a fresh development paradigm - The Himalayan Consensus - an innovative approach to development.

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