The United States vs. China. C. Fred Bergsten

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1 A New Global Economic Order?

      China will celebrate the hundredth anniversary of the takeover of the country by the Communist Party in 2049. President Xi Jinping envisages China becoming a, or the, “global leader by 2050.” He aims to establish a world-class military “that can rival or exceed the United States by 2049.” These are the target dates of the “hundred-year marathon” through which Chinese leaders since Mao Zedong have allegedly sought to catch up with the United States (Pillsbury 2016). The most thorough analysis to date of China’s intentions concludes that “Beijing’s ultimate objective is to displace the United States order globally in order to emerge as the world’s dominant state by 2049” (Doshi 2021). According to reasonable economic projections, China will by then account for about one-third of the world economy, and its per capita income would be about double the global average (Yang 2020).

      The annual meetings of the International Monetary Fund (IMF) and World Bank in one of those mid-century years could well take place at the gleaming new headquarters of the two institutions in Beijing or Shanghai. As mandated in their charters, the “principal offices” of the main international financial institutions will move from the United States to China if and when China becomes the largest shareholder in both.

      China has already become the largest economy in the world on some metrics. It is clearly the largest trading nation. It is, by far, the largest holder of foreign exchange reserves and is likely to soon become the world’s largest creditor country (Dollar 2020). By mid-century, China is quite likely to be the largest economy by all measures.

      If the Bretton Woods institutions continue to play by their current rules, China would then be eligible to hold the largest quotas and voting rights in both. Such a shift would dramatically symbolize the ascent of China in the world economy of the twenty-first century (see box 1.1).

Box 1.1 (When) Will the IMF and World Bank move to China?

      Article XIII:1 of the charter of the IMF requires that “the principal office of the Fund shall be located in the territory of the member having the largest quota,” i.e., its largest shareholder. The World Bank has a similar provision (Article V:9). These requirements were written into the charters in 1944 to ensure that the key financial institutions would be located in the United States.

      That premise has gone unchallenged for 75 years but will have to be revisited over the next several decades if China moves into a clearly superior position in terms of global economic presence, as projected in chapter 3. IMF Managing Director Christine Lagarde mused as early as 2014 that “the way things are going, I wouldn’t be surprised if one of these days the IMF is headquartered in Beijing” (Reuters 2014). China is now providing $50 million to fund a modest China–IMF Capacity Development Center in Beijing, administered by the Fund to offer courses on core IMF policy to students drawn half-and-half from China and developing countries (Dollar 2020).

      IMF quotas are supposed to be reviewed every five years to make sure that they faithfully reflect changes in the international status of the member countries. The last major realignment was agreed in 2010, with decisions made at that year’s G-20 summit in Seoul, to significantly increase the shares of China and a few other emerging market economies, largely at the expense of several European countries. The quotas are notionally based on formulas that have been negotiated over the years and “adjusted” judgmentally when final decisions are made. The formulas encompass four variables. The first and largest, with a 50% weight, is countries’ economic size, measured by their Gross Domestic Products (GDPs); these are in turn a blended combination with a 60% weighting for GDP at market exchange rates, and a 40% weighting for purchasing power parity (PPP) rates. The second main variable (at 30%) is a country’s exposure to the world economy, measured by its share of world trade. The third component is the variability (and hence vulnerability) of a country’s international economic position. The final component, with a weight of only 5%, is a country’s international reserve position.

Table 1.1 presents the current array of IMF quotas among the three largest currency issuers (United States, eurozone, China); a calculation of where they should be now if the formulas were applied faithfully; and projections of what the formulas would suggest for future quota allocation out to 2050 on the basis of our projections of economic and trade growth in chapter 3. They show that China is substantially under-represented now, would probably move into the top quota slot according to the formula by 2030 – ahead of the United States, and since the eurozone is not a country (see below) – and will clearly be in the lead by 2050 (even if its growth declines to 4 percent after 2030 and 3 percent after 2040). If the IMF and World Bank adhere to the mandates of their charters, China should therefore become the host of their headquarters by the middle of this century if the postulated economic developments come to pass.

Table 1.1 IMF quotas: Projections to 2050 on current IMF formula

      Note: Assume openness, variability, reserves remain constant over time. GDP projections are from IMF until 2024. Starting from 2025, GDP growth rates are specified as in the table. Euro includes 19 eurozone countries: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Spain. Euro quota is the sum of quotas of these 19 countries.

      Source: IMF, World Economic Outlook (October 2019).