Monday, August 10, 2015

Chinese Reaction to the IMF Announcement to Delay SDR Basket Review

The statement from the IMF that they have decided to "extend the current SDR basket by nine months until September 30, 2016" has created quite a stir. The initial reaction by many was to assume this meant that the IMF was going to delay making a decision on whether or not to include the yaun/renminbi in the basket until Sept 2016. 

A more parsed reading of the statement however led others to point out that the IMF did not say they have moved back the decision date for a new basket. Instead the statement just said that the current basket would be kept in tact until Sept 2016 and noted that "the proposed extension . . . would not in any way prejudge the timing of conclusion or outcome of the review."

Obviously, the wording used by the IMF left a lot to be desired. It created a lot of confusion and all kinds of instant analysis based on the idea that the decision on whether to add the yuan had been delayed. In some cases the statement was even interpreted to mean the decision had been made not to include the yuan. All this prompted Jim Rickards to call the IMF language "convulted" on his twitter feed while noting that the statement did not say the decision timetable had been moved back, only the implentation timetable. The IMF tried to clarify on its own twitter feed.

So how has China reacted to all this? 

So far I cannot find any official reaction from the Chinese government or the PBOC. But you can get a hint of how China may be reacting by looking at articles that are running in Chinese related media. Below are links from a few of those media sources with a quote or summary from the article just below. In general, the reaction seems to be very restrained and placing emphasis on the idea that nothing has changed in regards to including the yuan into the SDR basket except the date of actually including it. Here are the links:

WantChinaTimes - RMB Should be Put in SDR Basket: Expert

"We still think it is highly likely that RMB will be included–though for technical reasons, the actual date of inclusion may be extended to September 30, 2016, to give reserve managers time to adjust," Wang Tao, chief China economist at UBS, said in a research note."  . .  . . 

"We thought that RMB had a reasonably good chance of being included in the SDR basket soon, with approval in principle likely this year, and actual inclusion for technical reasons perhaps next year. It now seems that if approved this year, the actual technical inclusion would be by the end of September 2016," added Wang, a former IMF economist."   . . . 

"The IMF's Executive Board still plans to formally review the possibility of adding RMB to the SDR basket by the end of this year, senior IMF officials told Xinhua, after some media had reported the global lender might delay including the RMB in the SDR basket till September 2016."

South China Morning Post

"The International Monetary Fund has been asked to delay its highly anticipated move to add China's currency, the renminbi, to its Special Drawing Rights currency basket until September next year.
But the IMF board will still meet in November as scheduled to decide whether to include the yuan in its basket of reserves, comprising the US dollar, Euro, British sterling and Japanese yen.
Analysts said they were confident the IMF’s announcement of the potential postponement did not bode ill for the yuan’s chances of joining the exclusive club of the world’s top currencies. IMF managing director Christine Lagarde had said adding the yuan was merely a “question of when”.   . . . 
“We remain of the view that the renminbi will be included in the new SDR,” ING Asia chief economist Tim Condon said.
The currency’s internationalisation stood out as a reform area that had made the most visible progress since China’s third plenum in late 2013, Condon said.
He said he expected further capital account liberalisation measures to be rolled out, such as the widening of the US dollar-yuan trading band by year-end.
UBS Securities chief China economist Wang Tao  agreed that the yuan was still highly likely to be included.
“The IMF article implied a large likelihood of SDR inclusion. Otherwise, the technical preparation would not be necessary,” Wang said."

China Daily Runs a Whole Slew of Articles - see the list here

Here is one example from the list:

Yuan Still in Play for SDR Inclusion

"The International Monetary Fund said on Wednesday that the review on the inclusion of the yuan in its basket of Special Drawing Rights reserve currency is "well underway' and the formal discussions will take place toward the end of the year. Siddharth Tiwari, director of the IMF's Strategy, Policy, and Review Department, confirmed that the review schedule has not yet changed despite an IMF staff paper proposing the extension of the current SDR basket by nine months until Sept 30, 2016."
My added comments:

I still think there is a bit of game playing going on here at the IMF. While it is clear that the official IMF statement says the the timing for a decision on whether to add the yuan is not impacted by the decision to delay implementation of any change, there are other little hints that the IMF wants to leave some doubt out there.

This recent Bloomberg article included the following quote:

"The report suggests that while approval by the IMF board isn’t yet assured, it’s within reach, and the decision will come down to more than just the staff’s assessment. China has been pushing for the yuan to join the dollar, euro, yen and pound in the SDR basket; while France has called for including the yuan, the U.S. has urged China to keep moving toward a flexible exchange rate and making financial reforms to qualify."
The ultimate assessment by the board will involve a significant element of judgment,” the IMF report said."

This Bloomberg article clearly suggests that the IMF wants there to be some doubt as to whether the yuan will be included (or at least some doubt as to how long the delay might end up being).
If the only factor involved is simply the routine procedural mechanics of allowing people to adjust to the new basket, why say "approval by the IMF board isn't yet assured?"
Why say "the decision will come down to more than just the staff's assessment?"
Why say "the ultimate assessment by the board will involve a significant element of judgement?"
Why would the report say all this if the IMF wanted the convey the idea that including the yuan was already a done deal and only some routine procedural matters would delay the process?
For some reason, it appears the IMF wants to create some doubt assuming the Bloomberg article is accurate. Keep in mind these are the same people who told us that the IMF would absolutely implement a "Plan B" to get the 2010 governance reforms moved forward in early 2015 and then moved that to December 2015. Their track record on meeting deadlines does not exactly inspire confidence.

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