Divisions within the IMF, largely between industrialized countries and an influential group of developing nations including China and Brazil, have been heightened since the 2008 financial crisis spilled across the world out of the U.S. housing market.
More recently, IMF efforts to aid Europe were criticized by some emerging-market officials as more generous than programs established in response to financial crises in Asia and Latin America.
In this case, the evaluation office concluded, the fund’s staff opened a new line of research on the accumulation of foreign reserves around the world in “response to frustration” among “influential shareholders” that China was not allowing its exchange rate to fluctuate more freely. A steady rise in foreign reserves — a country’s holdings of dollars, yen or other major world currencies — can be the result of large trade surpluses. But it can also stem from an undervalued exchange rate, something that the United States has long accused China of maintaining to give its products a more attractive price on world markets.
The findings of that research showed China with perhaps double the recommended level of foreign currency holdings — its roughly $3 trillion stash is the largest in the world — and IMF officials suggested that excessive reserve holdings were a risk to global financial stability.
But the fund’s work was “not persuasive,” the evaluation office concluded, and characterized it as “addressing the symptom rather than the cause.” The audit report said that IMF staff overlooked some of the reasons for countries to accumulate reserves, and ignored related threats to financial stability that stemmed more from policies in the United States and other developed countries. In particular, China and Brazil have both argued that loose monetary policy in the United States has created a global glut of dollars that has distorted markets worldwide.
The fund “should have placed greater emphasis on more pressing issues than reserves, for example the growth in global liquidity and capital flow volatility,” the evaluation office concluded.
The IMF staff and Managing Director Christine Lagarde in separate written responses criticized the findings, arguing that the IEO singled out one strand of research that was part of a broader look at how to strengthen the international financial system. Other recent studies, for example, acknowledged that limits on the movement of capital into and out of a country can be a useful tool for a nation to protect itself — a point long argued by developing nations and now validated by the IMF.
The research on reserves, however, seemed to strike a particularly political note and was seen as a “stalking horse” for the United States to press China on its currency policy, said Amar Bhattacharya, head of the Group of 24, a consortium of developing nations that monitors the IMF.
The United States is the fund’s largest shareholder and has an effective veto over major decisions on the IMF board. In the aftermath of the crisis, Treasury Secretary Timothy F. Geithner and other U.S. officials were pressing China directly to float its currency.
Treasury officials had no comment on the report.
While IMF reports on China frequently mention its misaligned exchange rate — and the evaluation office complimented the fund’s bilateral analysis of that country’s economy — the sudden focus on reserve accumulation was seen to aid U.S. efforts to spotlight China’s “imbalances” rather than address an urgent concern.