Friday, January 15, 2016

Recap of Bretton Woods Committee Webinar on Renminbi and the SDR

I was able to watch the recent webinar hosted by the Bretton Woods Committee on China, the Renminbi, and the IMF's Special Drawing Rights (SDR). I was even able to get a question submitted to Dr. Warren Coats (about the 59 minute mark) who was one of the two speakers for the event. Here is a link to an audio of the webinar if you would like to listen to it.

Below is a brief summary of what was discussed based on notes I took during the webinar. Much of what was discussed has been covered here on the blog, but there were some interesting points of clarification by Dr. Coats on his proposal for a "Real SDR" which we have covered here on the blog.


The first speaker was Yu Yongding who is a Senior Fellow at the Chinese Academy of Social Sciences. He talked about how China views the inclusion of the Renminbi into the SDR currency basket and gave a history of the struggle that the PBOC has had with the exchange rate for the Renminbi. Below is a bullet point summary of his comments from my notes:

- China is of course pleased that the Renminbi was added to the SDR currency basket.  

- He views the importance of inclusion in the SDR basket as mostly symbolic in the short term

- inclusion of the Renminbi was important to China for promoting economic reforms and making progress towards opening up capital markets

- China (the PBOC) has changed directions several times in recent years on what to do about the value of the Renminbi. At times they have allowed the exchange rate to float freely and at other times they have moved to devalue it

- The cost of intervention to support the Renminbi by the PBOC is high in terms of burning up its reserves ($500 billion was used up in 2015)

- There is still an ongoing debate within China today about trying to intervene to support the Renminbi or allowing to to devalue further. The hope is that any devaluation can take place in a controlled mannner without panic in the markets

-Mr. Yongding recommends that the PBOC allow the Renminbi to float within a broad range. He says a 20% further devaluation is OK if it happens over time

-If China wants to see the Renminbi gain global acceptance, it needs to NOT be pegged solely to the US dollar so in this regard inclusion in the SDR currency basket was an important step 


Dr. Warren Coats was the next speaker. Dr. Coats commented on the impact of the inclusion of the Renminbi into the SDR currency basket and then discussed his proposal on how to make the SDR into a true global reserve currency that could function outside the IMF. These comments were significant in my view and added some clarity to this issue. Here is a bullet point summary from my notes of his comments:

- the addition of the Renminbi into the SDR currency basket is more important politically than economically. It did help promote reforms in China which he says is important

- the addition of the Renminbi did NOT have any "material significance" on the value or attractiveness of the SDR

-Dr. Coats then provided a brief history of the creation of the SDR and noted that it was originally intended to be a supplement to international reserves, but has never fulfilled this role so far

-the use of the US dollar as primary global reserve currency does have some costs. Dr. Coats says use of the US dollar forces the US to run a balance of payments deficit (to supply dollars to the world). He says this directly resulted in the movement of many manufacturing jobs out of the US 

-the SDR has the potential to become the primary global reserve currency in the future if the political will to do this were to arise. So far, the political will has not been there for this to happen

- the SDR is currently only used at the IMF, but the recent approval of the 2010 reforms by the US and the inclusion of the Renminbi in the SDR currency  basket are important steps towards broader use of the SDR in the future

- the inclusion of the Renminbi in the SDR basket was important to keep China engaged in the present Brettton Woods system as they were starting to move away from it with the AIIB etc.

-the SDR has failed to become a supplemental global reserve so far because of the lack of political will, not because of any administrative difficulty at the IMF for using it more broadly

-Once political will to use it exists, the IMF can promote invoicing using SDR's for things like oil and other commodities to encourage broader use of the SDR globally as a transaction currency

- the biggest roadblock to broader use of the SDR is how they are created. The quota system in use now keeps the SDR "inside" the IMF

-Dr. Coats proposal is for the method of SDR creation to change so that they are "issued" by a Currency Board (his real SDR proposal). As I understand his proposal, Dr. Coats feels this is the key to getting the SDR "outside" the IMF and into the global markets

- the SDR could "become the dominant global reserve currency overnight" if this change were made

My added comments: The items in bold above were significant in my view. Keep in mind that Jim Rickards has predicted that in the next major financial crisis (he says worse than 2008) the SDR will come forward as the proposed solution to the crisis. Please connect this idea to Dr. Coats comment that as soon as there is "political will" to use the SDR as primary global reserve currency, it can be done virtually overnight at the IMF with some changes. He should know since he was formerly the head of the SDR Division at the IMF.

Added note: I was able to get a question through to Dr. Coats during the webinar. My question was:

Is a digital global reserve currency feasible in the future? A digital bancor if you will?

Unfortunately, the computer I was using to watch the webinar had no microphone, so all I could do was submit this question by text message. This made it impossible to explain my question in more detail. Dr. Coats interpreted my question to be asking if some kind of cryptocurrency like Bitcoin could become a serious global reserve currency in the future. That's understandable since I was not able to clarify the question with more detail. 

He replied that while he was a supporter of "experiments" like Bitcoin he did not see them as ever having any serious or significant role as a global reserve currency in the future. He noted that all major currencies used now were basically digital. I completely agree with this assessment. One of the top experts in the world on this topic wrote a great two part article on the limitations of Bitcoin/Blockchain for this blog last year.

The question I was trying to ask Dr. Coats was if he could envision a "system approved" digital form of his "Real SDR" concept as a future global reserve currency (not a non system approved cryptocurrency like Bitcoin). 

By this I mean a new global currency used not only within the IMF, but outside the IMF by both commercial entities and private citizens. By digital I just meant that this would be a new currency unit that could exist alongside existing national currencies, but easily exchangeable (like mobile money) by anyone around the world. Kind of like a modern version of the old bancor concept. The currency could be made available to the public with new technology allowing for instant exchange on a mobile device. I was basically asking about his "Real SDR" currency unit being available to everyone on a mobile device.

Note:   After the webinar I reached out to Dr. Coats by email to see if I could ask my question in more detail. He graciously replied and provided some outstanding information in response to my question. In addition, he explained that my bullet point above using the phrase "getting the SDR outside the IMF" was off base. He went on to clarify how his proposal to issue SDR's would actually work. Dr. Coats granted permission to publish his email reply so I have a followup article here with that information for readers. A big note of gratitude to Dr. Coats for taking time to reply and granting permission to publish it. Readers here will benefit greatly from it. Dr. Coats is one of the foremost experts in the world on this topic. I encourage you to make others aware of this article.

For now, his comments that his "Real SDR" proposal could be implemented "overnight" if the political will to do so existed is a significant point to take from this webinar in my view.

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