Friday, November 21, 2014

IMF Reforms: If you can't pass em, bypass em

We have covered the fate of the proposed 2010 IMF quota reforms for a long time now. The most recent event noting that these reforms are still not approved was the G20 summit. We covered that in this blog post where we also reported that there could be a plan in mind for the Obama Adminstration to bypass the US Congress to approve these. 

While we wait to see how that turns out, we can observe that China intends to move forward on internationalization of the yuan no matter what Congress does. Some relevant articles are linked below. Read the entire articles to get full context.

China has been relentless in setting up trading hubs around the world for the yuan. These are necessary steps to eventually get the yuan recognized around the world as a reserve currency. This BRICSPost article talks about the latest agreement with Australia. Here are some quotes from this article:

"China and Australia signed a deal in Canberra on Monday to launch an RMB clearing service in Sydney, the latest move to expand the offshore yuan market."
"According to the memorandum of understanding inked by the two countries’ central banks, the People’s Bank of China and the Reserve Bank of Australia, China will set up a clearing bank in Sydney to handle transactions denominated in RMB, or the Chinese yuan."
"So far this year, the world’s second largest economy has reached agreements with Germany, Britain, France, Luxembourg and South Korea to open local RMB trading hubs, as the Chinese currency has gained increasing popularity in global trade and investment."
"China is now Australia’s largest trading partner, export market and source of imports. Two-way trade reached $136.4 billion in 2013, a year-on-year rise of 11.5 per cent."
Notice all the agreements signed this year mentioned in the article. China has also been active getting the yuan setup in London and Canada. Russia and China will move towards their own currencies in trade between them bypassing the US dollar. 
This Bloomberg article talks about how all this helps position the yuan to be added into the basket of currencies that makeup the SDR (the currency unit used at the IMF) when that issue comes up in mid 2015.
Bottom line: No matter what the US Congress does with the 2010 IMF reforms, China is moving full speed ahead to get its currency recognized in the SDR basket at the IMF. All the BRICS nations will surely be in favor of that change. The IMF will be motivated as well because they are concerned that the inability to pass the 2010 quota reforms will cause the BRICS to distance themselves further within the IMF and make it harder to work together.

We can expect that the SDR basket will very likely be changed to include the yuan in 2015. So, as the title of this post suggests, if you can't pass IMF reforms, bypass em (one way or another).

Note: this won't be the same as passing the actual 2010 quota reforms, but it will be a public gesture of added prestige towards China (and the BRICS) at the IMF. 

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