STOCK MARKET WATCH -- Thursday, 20 December 2012

[Demeter]

15. Auditor finds IMF was pressured by U.S. to fault China

WHO WOULD HAVE THOUGHT IT?

http://www.washingtonpost.com/business/economy/auditor-finds-imf-was-pressured-by-us-to-fault-china/2012/12/19/64979dae-4a11-11e2-ad54-580638ede391_story.html

The International Monetary Fund, at the urging of the United States, shaped recent research to pressure China over its economic policies, according to a study released Wednesday by the fund’s in-house watchdog.

The report by the IMF’s Independent Evaluation Office provides an unusual look at how the political priorities of the fund’s major members can influence what is ostensibly objective analysis by an apolitical organization.

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.

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