Yuan Has Real Shot at IMF Blessing on Reserve Status

[Nadita]

Yuan Has Real Shot at IMF Blessing on Reserve Status

By Andrew Mayeda and Fion Li 
December 11, 2014 8:11AM

 

Photographer: Qilai Shen/Bloomberg

People’s Bank of China Deputy Governor Yi Gang said in October, SDR status will happen when conditions are right, and governments and officials, “including those working at the IMF,” are aware of the appetite in global markets for the yuan.

 

For the first time, China has a real shot at getting the International Monetary Fund to endorse the yuan as a global reserve currency alongside the dollar and euro.

 

In late 2015, the IMF will conduct its next twice-a-decade review of the basket of currencies its members can count toward their official reserves. Including the yuan in this so-called Special Drawing Rights system would allow the IMF to recognize the ascent of the world’s second-biggest economy while aiding China’s attempts to diminish the dollar’s dominance in global trade and finance.

 

China would need to satisfy the Washington-based lender’s economic benchmarks and get the support of most of the other 187 member countries. The Asian nation is likely to pass both tests, said Eswar Prasad, who until 2006 worked at the IMF, including spells as heads of its financial studies and China divisions.

 

“It will certainly help China’s objective of making the renminbi a more widely-used currency,” said Prasad, a professor of trade policy at Cornell University in Ithaca, New York, and senior fellow at the Brookings Institution in Washington. Renminbi is China’s official name for the yuan.

 

Reserve-currency status for the yuan would make central banks, particularly those in developing economies, more eager to hold yuan assets and “diversify at the margin away from dollars,” as well as euros, yen and Swiss francs, Prasad said.

 

Passing Test

 

Approval hinges partly on whether the IMF reverses its 2010 decision that the yuan wasn’t “freely usable.” There’s growing evidence that the currency may now pass this test, after already qualifying on the IMF’s other condition of being a large exporter.

 

The proportion of China’s trade that’s settled in yuan has risen to about 20 percent; the market for yuan-denominated Dim Sum bonds has grown to $72.9 billion from nothing in just seven years; and the government has loosened controls on foreigners’ access to its financial markets. China has also signed agreements to trade the yuan freely in cities from Hong Kong and Singapore to

 

Frankfurt and London.

 

The IMF said in an e-mailed statement that since the last review, “there have been a number of developments regarding the RMB’s international use, and the upcoming review would take stock of these developments.”

 

SDR status will happen when conditions are right, and governments and officials, “including those working at the IMF,” are aware of the appetite in global markets for the yuan, People’s Bank of China Deputy Governor Yi Gang said in October.

 

The PBOC didn’t respond to a faxed request for comment.

 

‘Conducive’ Environment

 

There’s a “very high chance that the yuan will be included in the SDR,” Nathan Chow, an economist at DBS Group Holdings Ltd. who previously worked at the Hong Kong Monetary Authority.

 

“Both political and economic circumstances are conducive,” Hong Kong-based Chow said.

 

China’s currency will probably be more widely used than the yen and the pound in financial markets and trade in a few years, and the government should lobby other countries to have it included in the SDR basket, the Shanghai Development Research Foundation said in a report this year.

 

The yuan’s share of money transferred around the globe rose to a record 1.72 percent in September, making it the seventh most-used currency, according to the Society for Worldwide International Financial Telecommunication, the La Hulpe, Belgium-based cooperative that processes international funds transfers for more than 10,000 banks and other customers in 215 countries.

 

Fixed Rates

 

The IMF created the SDR in 1969 to support the Bretton Woods system of fixed exchange rates after supplies of gold and dollars proved inadequate. Owning SDRs gives countries a claim to the four currencies in the basket: the dollar, euro, yen and U.K. pound.

 

About $300 billion in SDRs are outstanding globally, according to the IMF. They accounted for $52 billion of the $135 billion in U.S. official reserve assets as of Nov. 28, Treasury

 

Departmentfigures show.

 

The yuan is still dwarfed by the dollar in terms of usage in international trade and finance. When quoting countries’ foreign reserves, the IMF lumps it into its “other currencies” category, which accounts for just 3 percent of the $6.3 trillion in allocated holdings. The dollar has a 60.7 percent share, with 24.2 percent taken up by the euro and 3.9 percent by the pound.

U.S. Veto

 

The U.S. could potentially veto the yuan’s inclusion in the SDR basket because the change would require the support of as much as 85 percent of voting shares on the IMF’s executive board.

 

The U.S. has 17 percent of the votes. The IMF said it’s too soon to say whether the move would require 70 percent or 85 percent of the vote under the institution’s bylaws.

 

Holly Shulman, a Treasury Department spokeswoman, said in an e-mail that it’s too early to speculate on the outcome of the IMF review.

 

China probably hasn’t done enough to liberalize controls over its currency and financial markets to sway the U.S., said Edwin Truman, who was assistant secretary for international affairs at the

 

Treasury Department during the Clinton administration. The Asian nation maintains restrictions on capital flows to prevent speculators from inflating the economy.

Currency Controls

 

The IMF’s requirement for a “freely usable” currency “basically means there aren’t any controls on getting into and out of a currency, and China’s a good ways from that,” said Truman, now a senior fellow at the Peterson Institute for International Economics in Washington.

 

Even so, China has pledged to move toward a market-determined exchange rate, and the yuan’s gains this year may help reassure U.S. officials who have accused the PBOC of debasing its currency for economic advantage.

 

Even after a 1.2 percent drop since the end of October, the yuan is still up 0.3 percent versus the dollar in the second half, the only one of 31 major currencies tracked by Bloomberg to have strengthened.

 

SDR status would be a “relatively easy” way for the world to acknowledge China’s economic ascendancy, said Benjamin J. Cohen, a professor of international political economy at the University of California at Santa Barbara. It overtook Japan to become the world’s second-biggest economy in 2010.

 

“It’s very difficult to imagine they won’t include the yuan in the basket,” Cohen said. “China has to be mollified.”

 

To contact the reporters on this story: Andrew Mayeda in Ottawa at [email protected]<script type="text/javascript"> /* */ </script>; Fion Li in Hong Kong at [email protected]

 

To contact the editors responsible for this story: Chris Wellisz at [email protected]; Robert Burgess at [email protected] Scott Lanman, Paul Armstrong

 

http://mobile.bloomberg.com/news/2014-12-11/yuan-has-real-shot-at-imf-blessing-on-reserve-status.html

Edited December 15, 2014 by Markinsa
Added Paragraph Breaks

[tlars brother]

I hate to bursts some folks bubble, but the Yuan nor China's relationship with the IMF has nothing to do with the RV of the IQD.  The GCR will not happen for many months down the road.  The reval of the IQD is  part of first GCR step, but that is the extent of their relationship

[Butifldrm]

 Nadita I find it very interesting that China on the 11th of December is calling the US as having the largest economy.  While for at least 2 weeks every news agency known to mankind has stated that China is now the number one economy.  http://www.foxnews.com/world/2014/12/06/china-surpasses-us-to-become-largest-world-economy/.  yes China does have a shot as a reserve currency included in the SDR basket.  What's crazy is the yen is included within this basket and Japan has been on a suicide mission of debasement.  I'm sure this scares the beJesus out of the IMF.  China deserves their placement in the SDR economically, but our government appears to know what that would mean for the US economically, and that would not be good for the dollar.   Every currency in the IMF  basket is leveraged by the least 80:1. China, not even included in this basket is leveraged 80:1.  They are all controlled by the printing press.  The only currency not leveraged to this extent is the SDR.  Rickards, believes the SDR will replace the Dollar as the World Reserve Currency.  When that happens Only God knows.

 

 

Jim Rickards: All Roads Lead to the IMF; SDRs to Replace Dollar as New World Currency

 

 

JIM RICKARDS04/28/2014

 

 

 

 

 

 

 

 

Excerpts

"When you start manipulating markets and you're relying on data to guide your decisions, but the data itself is the result of the prior manipulation, then the data is no good and you're just going to make more bad decisions." 

"We haven't had much inflation yet, that's true. But you can see it coming from the actions of the Fed and the Fed has said publicly that they want inflation. And yet, some people think that 2.5% or 3% inflation is benign saying, 'Well, that's not too bad. We can live with that.' That's not true. I mean 3% inflation will cut the value of your purchasing power in half in about 24 years…there's nothing benign about it."

"When people talk about deficits, my first question is, ‘Okay, tell me what the deficit is, but also tell me what the growth rate is?’ And if you're growing faster than you're borrowing then the debt is sustainable. But if the debt is going up faster than the economy is growing, then the debt is not sustainable. So, where are we today? We are at a point where even today those debts are still going up faster than growth, and that's a recipe for disaster."

"Sovereign banks bailed out the private sector, but now who's going to bail out the sovereign banks because they are all—all the major ones anyway—are insolvent now on a mark-to-market basis. Well, who's bigger than a sovereign? The answer is the IMF.”

“This is not well-known, but they have a printing press also. They can print special drawing rights, so-called SDRs... Just to be clear: you and I are not going to have SDRs in our pockets. We're still going to have US dollars. It's just that the dollar will cease to function as the global reserve currency. It will be a local currency...but it won't be used for the big things [like]…the price of oil, settlement and balance of payments between countries, rescue packages, and probably the financial statements of the hundred largest corporations, [which]…in the not too distant future they'll actually publish their financial results in SDRs, not in dollars.”

"People use the phrase, 'kick the can down the road'...it's more like kicking the can upstairs. So, going from private debt to a sovereign debt bailout was kicking the can upstairs… And the reason is that the central banks used up their balance sheets—used up their capacity—to deal with the last crisis. So they've got nothing left to deal with in the next crisis. So it's going to have to go to the IMF because they have the only clean balance sheet left in the world. Just to give you a concrete example...the Fed is leveraged 80:1. The IMF is only leveraged 3:1, which means the IMF has a lot of headroom to issue new money and they will. I've had private conversations with senior people and they say they will do it."

"What the elites are trying to do is they're trying to engineer higher inflation to make the debt worth less, keep a lid on interest rates so they don't get even more debt on top of it, rob the savers—do it through the banking the system—and print the money at the IMF. So it's all kind of one big thing that they're working on...again this is not speculation, there are academic papers on financial repression, there are official IMF papers on SDRs. This is all out there and I've researched it and put it all in The Death of Money."

(Click here to listen to part 1)

http://www.financialsense.com/contributors/jim-rickards/death-of-money-interview-part-2

Edited December 13, 2014 by Butifldrm

[Nadita]

China is waiting at the door step my mom always said not to

Underestimate china

[vietnam1969]

China has been at the back of the bus(so to speak of) for many years just waiting for the right moment to start walking towards the front. Wake up people and look around you and see that their time has come to be heard and they are marching forward in world trade and turning heads of world leaders so don't under estimate them. Their leaders are wise so beware of their intentions.  And BTW, I agree with Nadita's post.

[temperament5]

I agree China is chomping at the bit to become the World Reserve Currency and are doing everything in their power to position themselves as so. Whether they replace the U.S. Dollar or something else does it will take the U.S. Economy down.  The financial crisis that we lived through a few years back was nothing compared to the affects this will have when it happens.  We need to make sure we educate ourselves on the world economy and how it impacts us domestically.  Be prepared!