Monday, July 27, 2015

Reuters: IMF told China it is worried about Investment Mobility

As we get closer to finding out what the IMF is going to do about adding in the Yuan to the SDR currency basket, it seems like the IMF is becoming more coy about things. In this Reuters article, there is the suggestion that the IMF has not yet decided to add in the Yuan this year. Below are some quotes and then a few added comments.


"The International Monetary Fund (IMF) has told China about its concern over investors' ability to enter or leave Chinese financial markets as they wish, said sources with direct knowledge of the matter.

Those worries were raised last month when the IMF met with Chinese officials in China to discuss the chances of including the yuan CNY=CFXS in the fund's basket of currencies, also known as the Special Drawing Rights (SDR).

The SDR is an international reserve asset, and Beijing has been lobbying the IMF to include the yuan in the basket to boost the currency's global clout to complement a rising Chinese economy and reduce China's reliance on the dollar .DXY.

The talks were held before Chinese shares plunged as much as a third in late June, prompting Beijing to stage its biggest-ever rescue of the stock market.

The measures, which included steps such as barring some investors from selling their shares, drew criticism of unwarranted government interference and cast doubt on China's appetite for market reforms.

The IMF requires any SDR currency to be "freely usable", a criteria that U.S. Treasury Secretary Jack Lew said in April that China has yet to meet."
My added comments:
While it is impossible for those of us on the outside to know what all is going on in situations like this, there are some facts we can list and perhaps tie together.
- there are many alternative media sites suggesting that China is either planning to back the Yuan with gold (something the US and IMF would not like) or "take over" the IMF from within.
- China has been buying a lot of gold and many sources confirm that fact. However, China recently announced a much smaller gold reserve than virtually all analysts expected (something the US and the IMF might prefer China to do).
-China clearly wants the Yuan to become more globally accepted and sees its inclusion into the SDR currency basket as a key step in that process.
-the Chinese market has taken a sharp dive recently. Some in the alternative media have suggested the US might have been behind this in some way to send a message to China as to who remains in charge in the world and at the IMF.
-China continues to move forward with potential competitors to the IMF and the World Bank (perceived to be US and western dominated institutions) in both the BRICS Bank (NDB) and the AIIB (Asian Infrastructure Investment Bank). On top of that they are also pushing the Silk Road project and more cooperation with Russia in the Shanghai Cooperation Organization. All of these basically exclude the US right now.
If we look at the set of facts above we can at least try to tie them together to see if we can get a picture that makes sense. Right now the most likely scenario is that China (leading the BRICS nations) wants badly to broaden the use of the Yuan around the world. They seem to have set in motion several efforts to that end. They are buying gold, they are pushing the IMF to add the Yuan into the SDR basket, and they are also building up new global financial institutions that have the potential to compete with the IMF and the World Bank even though they talk about "complementing" those institutions. China likes to move very slowly and in a very calculated fashion so these steps all make sense.
It appears that the US wants to allow China some room for more influence at the IMF and to broaden the use of the Yuan, but wants to keep China on a leash so to speak. The US may be trying to keep China in line by offering the carrot of adding the Yuan into the SDR basket so long as China plays ball with US global interests. Those interests might include allowing the US to remain the leading major power at the IMF and not doing anything to promote gold around the world as an alternative to the current fiat system (hence the move by China to report lower gold reserves than expected).
It looks like China may be OK with those terms, but is slowly and steadily moving forward with the new NDB and AIIB so that they always have a Plan B to go to if relations with the US and the western institutions go south.  China can also use these new institutions as leverage to pressure the US and the west to give them more influence in the global financial system. Think of all this like moves in a chess game if you will.
If this analysis is correct, this fall will be very interesting. We will find out if the US/IMF and China can conclude a deal that both sides can live with going forward. If you see the Yuan get added into the SDR basket now, it implies that such a deal has been struck. If that does not happen at this five year review by the IMF, it could imply that China may shift the bulk of its efforts going forward into the NDB and the AIIB. This could lead to a competition that is more confrontational than complementary between the global institutions. It will be interesting to see what China does with their gold as well (don't forget that Russia also continues to add large gold reserves). 
By watching for these signs this fall, we may get an idea if the world is headed for more cooperation at the global level or more decentralization (and less cooperation). The actual addition of the Yuan into the SDR basket by itself is not likely to initiate any major monetary system changes. But it may very well signal which way things are headed and how some bigger changes may unfold later on. We know what to watch and will do that here on the blog.

No comments:

Post a Comment