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Democrats Want To Give China Billions. Here’s How

(Lintao Zhang/Getty Images)

Varun Hukeri General Assignment & Analysis Reporter
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President Joe Biden’s assumption of office may have revived a plan by Congressional Democrats to push through a spending boost for the International Monetary Fund (IMF) that critics argue would ultimately provide China with billions of dollars.

IMF Managing Director Kristalina Georgieva called in March 2020 for the U.S. and other major economies to contribute to a significant increase in the international financial institution’s reserve assets known as special drawing rights (SDRs), Reuters reported.

SDRs were created as a supplementary international reserve asset and can be used by member states to provide liquidity and supplement currency reserves. The value of SDRs is based on five currencies — the U.S. dollar, the euro, the British pound, the Chinese renminbi and the Japanese yen.

The IMF noted in a statement last year that roughly $281 billion have been allocated to member states. The financial institution has argued that even more funding is needed to address global economic uncertainty fueled by the coronavirus pandemic, according to Reuters.

But the Trump administration blocked a proposed $500 billion issuance last year, Bloomberg reported. Then-Treasury Secretary Steven Mnuchin said the administration opposed the plan to fund SDRs as the reserve assets are allocated to countries in proportion to their voting share in the IMF.

The number of votes allocated to an IMF member state is based on how much money they send to the institution. The U.S. is by far the most influential member state as it funds 17.4% of the IMF’s budget and in turns receives 16.5% of the vote, according to IMF data.

Japan and China each fund roughly 6% of the IMF’s budget and in turn receive 6% of the vote. Other advanced economies including Germany, France and the U.K. also have higher rates of representation in the IMF.

The Trump administration’s assessment appears to have been correct as 70% of the increase in SDRs would go to the 20 most advanced economies in the world while just 3% would go to the poorest developing countries, according to Bloomberg. Georgieva previously said the IMF is considering an alternative SDR distribution process but such reforms have yet to materialize.

Newly selected International Monetary Fund (IMF) Managing Director Kristalina Georgieva speaks at a press conference at the IMF headquarters on September 25, 2019, in Washington. - The IMF on Wednesday formally selected Georgieva of Bulgaria to be only the second woman to lead the 189-member institution. (Photo by Eric BARADAT / AFP) (Photo by ERIC BARADAT/AFP via Getty Images)

International Monetary Fund Managing Director Kristalina Georgieva speaks at a press conference (Eric Baradat/AFP via Getty Images)

SDRs were also created to meet a “long-term global need” in reserve assets according to the IMF, and were never intended for countries to address short-term economic emergencies like the coronavirus pandemic. The countries that would receive the largest share of new SDRs are already advanced economies that have more resources to deal with the pandemic than poorer countries.

Under a proposal introduced by Congressional Democrats last year, more than $170 billion in exchangeable SDRs would go to China. But the communist regime — according to publicly available data — has largely overcome the pandemic and was the only major country with positive economic growth in 2020.

Republican Arkansas Rep. French Hill argued in a recent Wall Street Journal editorial that indirectly filling Beijing’s coffers through an SDR funding bill “is the last thing” Democrats should endorse.

China has been criticized for flouting international credit standards and exploiting developing nations with unsustainable debt traps. The country has also faced global condemnation for its human rights violations against Uighur Muslims in Xinjiang and pro-democracy protesters in Hong Kong.

BEIJING, CHINA - JANUARY 26: Chinese police officers wearing masks stand in front of the Tiananmen Gate on January 26, 2020 in Beijing, China. The number of cases of coronavirus rose to 1,975 in mainland China on Sunday. Authorities tightened restrictions on travel and tourism this weekend after putting Wuhan, the capital of Hubei province, under quarantine on Thursday. The spread of the virus corresponds with the first days of the Spring Festival, which is one of the biggest domestic travel weeks of the year in China. Popular tourism landmarks in Beijing including the Forbidden City, Badaling Great Wall, and The Palace Museum were closed to the public starting Saturday. The Beijing Municipal Education Commission announced it will delay reopening schools from kindergarten to university. The death toll on Sunday rose to 56. The majority of fatalities are in Wuhan where the first cases of the virus were reported last month (Photo by Betsy Joles/Getty Images)

Chinese police officers wearing masks stand in front of the Tiananmen Gate in Beijing, China (Betsy Joles/Getty Images)

Another potential problem with SDRs is that smaller economies that receive SDRs could use that funding to borrow even more money from Chinese banks and private creditors. Much of the developing world already faces a looming debt crisis due to coronavirus and a recent wave of risky borrowing, according to The New York Times. (RELATED: China Opens Up A New Front In Its Economic War Against The US)

Hill noted in The Wall Street Journal that Chinese banks have been one of the largest beneficiaries of global debt, and allocating SDRs could make the restructuring or forgiveness of Chinese government loans less likely.

But Democrats in Congress continue to push for legislation that would allow the IMF to issue at least $2 trillion in SDRs to member countries.

The Democratic-controlled House of Representatives passed legislation in July 2020 as part of the annual defense appropriations bill that would authorize the federal government to allocate around $2.8 trillion at the current exchange rate for SDRs.

Speaker of the House Nancy Pelosi (C), flanked by House Permanent Select Committee on Intelligence Chairman Adam Schiff (R)(D-CA), House Judiciary Chairman Jerry Nadler (L) (D-NY), House Foreign Affairs Committee Chairman Eliot Engel (2ndR) (D-NY), House Financial Services Committee Chairwoman Maxine Waters (background)(D-CA), and House Committee on Oversight and Reform Chairwoman Carolyn Maloney (2nd R) (D-NY), speaks as Democrats announced articles of impeachment against US President Donald Trump during a press conference at the US Capitol in Washington, DC, December 10, 2019 listing abuse of power and obstruction of Congress. (Photo by SAUL LOEB / AFP) (Photo by SAUL LOEB/AFP via Getty Images)

Speaker of the House Nancy Pelosi, flanked by top House Democrats, speaks during a press conference (Saul Loeb/AFP via Getty Images)

But the Republican-controlled Senate did not back the allocation and any future discussion on SDRs was tabled.

“There are many in the Democratic fold writ large who have argued the case for an SDR allocation,” former Treasury Department official Mark Sobel told Bloomberg.

Leaders of the Congressional Progressive Caucus, the Congressional Black Caucus, the Congressional Hispanic Caucus and the Congressional Asian Pacific American Caucus sent a letter to House Speaker Nancy Pelosi in November 2020 urging House Democrats to back a funding measure for SDRs in any future coronavirus relief bill. (RELATED: Nancy Pelosi Crippled The House GOP Using Nothing But A Rule Change)

“SDRs, the IMF’s internal currency, would be distributed for free to low-income countries, which would then be available to be exchanged for hard currency such as U.S. dollars,” Democrats said in a statement. “This would help many countries avoid balance-of-payments crises, debt crises, and critical shortages of imports, such as food, medicine and medical equipment.”

Biden has not publicly commented on whether his administration will back the SDR proposal but some of his top allies including former Treasury Secretary Larry Summers have advocated for the move, according to Reuters.

Democrats may now have a stronger chance of passing an SDR funding bill as they hold majorities in both chambers of Congress.