A Research On IMF's Exchange Rate Surveillance

Since 2008,the dispute over the exchange rate is becoming a core issue in the bilateral relation between China and the U.S.The U.S.blames China for manipulating its currency to gain an unfair trade advantage.This induces the U.S.to take action to put pressure on China not only through unilateral domestic legislation,but also through multilateral channels such as G7,WTO and Word Bank in purpose of pushing RMB appreciation to reduce the huge deficit of international income.Through all the measures the U.S.has taken,the complexity of exchange rate problem and the importance of the function of IMF in handling this issue was vividly exhibited.Surveillance of members' exchange rates(SER) is the core function of International Monetary Fund(IMF).According to the Articles of Agreement of IMF,the purpose of SER is to promote the orderly exchange arrangement among members and the stability of exchange system,to eliminate foreign exchange restrictions which hamper the growth of world trade and to avoid manipulation of exchange and discriminative politics to gain unfair comparative advantage.Under the Bretton Woods System of fixed exchange rates,the primary goal of SER is to achieve the stability of exchange rates,which is to say,IMF was concerned on the exchange arrangement of members.After the collapse of Bretton Woods System,exchange floating was becoming the dominating exchange regime and,consequently, the frequently abrupt floating of exchange rate often led to misadjust of balance of payments of members and the large amount of capital flow,which unavoidably cause outbreak of financial crisis.After the collapse of Bretton Woods System,to eliminate the negative consequence of abnormal floating of exchange IMF adopted its Second Amendment of Articles of Agreement and Jamaica Agreement to entitle members to adopt exchange rate arrangements at theirs own will.The primary purpose of SER is to protect a stable system of exchange rates.According to Article?,IMF shall set principles to supervise the exchange policies of members.1977 Decision is the first guidance that set out to avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.While the 1977 Decision had been playing an important and unique role in exchange rate surveillance,it has two basic defects:the limited surveillance scope and lack of clear standards in surveillance.Since then,the world economy and financial system experienced substantial change,IMF's SER also changed a lot which was surpassed the effective scope of 1977 Decision.It focused exclusively on surveillance over exchange rate policies,and its coverage was relatively narrow even in that area.The Decision was expected to be revised with experience.Therefore,IMF reviewed 1977 Decision and thirty-year' operational experience and adopted a new 2007 Decision.IMF needs to play the crucial role in this process.Strengthening SER is an important part of IMF's Medium-Term Strategy,which has reexamined the future directions of the IMF in light of economic and financial globalization. The new Decision crystallizes a common vision of the best practice of surveillance,brings greater clarity and specificity to what exchange rate policies countries should avoid and when these policies may be of concern to the international community.The main progress of 2007 Decision is the introduction of the new concept of external stability as an organizing principle for bilateral surveillance.This reflects the new direction of surveillance,especially the global meltdown intrigued by American's sub-prime crisis.With the on-going turmoil of global financial market,SER is becoming more and more important in the process of recovering from the crisis and the reforming of the role of IMF. The solution to current economic crisis needs global cooperation and multilateral consultations.The dissertation intensively review and explore the whole range issues of IMF's SER, comprehensively evaluate its institutional arrangement,systematically tackle its problems and gives the implication for SER's future improvementThe dissertation is divided into nine chapters.It develops in the following logic:a introduction of background of SER,then the definition and clarification of relative concepts, the historical development and economic foundation of SER,the legal framework both in substantial and procedural aspects of SER,the analysis of its defects and prospectus of future development in the new era,the relationship between IMF's SER and others surveillance, finally,the application of the dispute of RMB and possible solution.Chapter one introduces the background of IMF's SER and research framework of this thesis.It describes the historical origin and function of IMF's SER in international financial system.It clarifies the relative concepts and differences of SER from the perspectives of international politics,political economy,international relation and international law.This chapter also introduces the basic idea and structure of the thesis.The second chapter analyzes the causes of SER.The problem of exchange rates basically is an economic subject.Therefore,in order to correctly understand the arrangement of SER,it is necessary to clarify the economic attributes of exchange rates.This chapter includes five sections:The relationship between Exchange rate and global imbalance,the policies and externality of exchange rates,the bipolar hypothesis and middle arrangement of exchange rates,the stability of exchange rates and currency externality and currency union.This chapter emphasis that the future direction of SER reform is the construction of a surveillance system that facilitates to build the external stability of global economy.Chapter three elaborates legal framework of SER.In jurisprudence SER is the result of the adequate demise of currency sovereignty of sovereign countries.Article?confers IMF the rights to surveillance of members' exchange rate and the board of directors of IMF lay out 1977 Decision to guild the practical operation of SER.After 30 years' practice and development,in order to strengthen IMF's function in international monetary system,IMF adopts the mid-term strategy and consequently 2007 Decision to include new development of experiences and economic changes.The most important point of 2007 Decision is embedded principle of external stability.In the fourth chapter,the dissertation illuminates four principles of SER under the current institutional arrangement.They are principle of avoiding exchange manipulation(PAE), principle of positive intervene(PPI),principle of mutual interests(PMI),and finally,also most importantly,principle of external stability(PES).This chapter focuses on the PES, which means "A member should avoid exchange rate policies that result in external instability".The rest three principles which derive from 1977 Decision respectively are(1) A member shall avoid manipulating exchange rates to gain an unfair competitive advantage over other members;(2) A member should intervene in the exchange market if necessary to counter disorderly conditions;(3) Members should take into account in their intervention policies the interests of other members.The new PES reflects the guidance of future reform of international monetary system,is a real "silent revolution".It in fact expends the power of IMF and legal foundation of IMF to expand the surveillance scope.This chapter explores in details of the meaning,judgment and indicators as well.Chapter five discuss the procedural aspect of SER,including three categories,which are bilateral,multilateral and regional surveillance.This chapter also discusses the scope,general procedure,and the defects of SER,This chapter also explores the information sources and surveillance power of SER.Chapter six elaborates the SER's scope,especially its consultation process.It points out the multilateral consultation shall be highly emphasized for future development of IMF's SER.The seventh chapter researches on the mutual complementary and cooperation relationships between IMF and other organizations such as World Bank,WTO and European Union,etc.In review of the structure of the current international monetary system,IMF's surveillance shall be at the central of the global surveillance system and coordination among the aforesaid institutions is essential to achieve the goal of building a stabilized world economy.Chapter eight set out to analyze the problem that facing SER from the internal and external review,and gives some suggestions on how to reform the SER.It points out that the emphasis of SER after the global financial crisis intrigued by American credit crunch shall be switched to the surveillance of the financial markets of developed countries which may substantially affect the global economic stability.In review of the present circumstance,the possibility of significant change of global monetary structure is tiny.Therefore,enhancing the core function of surveillance of IMF shall play an indispensable role in stabilizing global economy and perfecting international monetary system.Chapter nine analyzes the problem in the practice of the surveillance over RMB.The U.S. always blames China for manipulating currency in order to gain unfair trade advantage,and insists this problem should be solved in the framework of the Articles of Agreement of IMF. Under the current arrangement of the international economic order,the problem of currency manipulation falls under the jurisdiction of the IMF,but China's currency policy is neither consistent with its obligation to the IMF protocol,nor compatible with the multiple currency practices which potentially can lead to exchange rate subsidies under the WTO.This induces the U.S.to take unilateral action to put pressure on China through domestic legislation,but it is not a positive way to resolve the problem.A better method would be to strengthen the strategic economic dialogue and cooperate with other international organizations to assist China in establishing its capacity for a free currency policy.The last chapter concludes the whole dissertation by stating the main points, contributions of this research and ideas for future study.