Europe will give up two of its eight seats on the 24-member board, which will be taken up by Brazil, Russia, India and China. In total, more than six per cent of the voting rights will be transferred.
It is still unclear which European countries will miss out, although chancellor George Osborne has insisted that Britain will not give up any of its voting rights.
Still, the deal catapults China over the heads of Germany, France and Britain, to become the third most powerful member of the IMF, up from sixth spot currently.
IMF managing director Dominique Strauss-Kahn called the agreement historic. “This makes for the biggest reform ever in the governance of the institution,” he said.
The announcement was made as finance ministers from the Group of 20 major economies met in South Korea. They also agreed to shun competitive currency devaluations but stopped short of setting targets to reduce trade imbalances that are clouding global growth prospects.
Key points in G20’s deal to avert a currency war
● Pre-summit meeting
Finance ministers from the G20 nations met in the South Korean city of Gyeongju over the weekend to thrash out a deal ahead of the G20 summit in Seoul on 11 and 12 November.
● Currency truce
The group released a communique after the meeting, promising to “move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies”.
● The role of the US
The G20 said “advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates,” in a nod towards the US’s responsibility in keeping rates stable.
● Trade imbalances
The group will “pursue the full range of policies conducive to reducing excessive imbalances” but gave no details.
● Basel III
As expected, the G20 said it will accept the Basel III banking capital rules in their entirety at its full meeting in November
● After-hours meeting
US Treasury secretary Tim Geithner held talks with the Chinese vice-premier after the G20 meeting in an attempt to patch up growing tensions between the two economic powers
● Will it work?
Analysts were divided. Some had hoped for a deal similar to the Plaza Accord in 1985, which was put in place by the G5 to manage the depreciation of the dollar.