Saturday, April 16, 2016

David Marsh (OMFIF) on Why China is Promoting the SDR

David Marsh of the OMFIF writes this new commentary on why China would like to see broader adoption of the SDR. As we have noted here, he says the process will take some time. Below are some quotes from his new commentary. This article is further confirmation that we can expect change to take place gradually unless a crisis were to speed things up.


"China’s utterances over the years on the International Monetary Fund's special drawing rights confirm the Beijing authorities’ delphic reputation for long-term thinking. The mystery is starting to look a little less obscure. China is embarking, pragmatically but steadily, towards enshrining a multicurrency reserve system at the heart of the world’s financial order.
Although it accepts that many years will elapse before the dollar can be dethroned from its No.1 role, Beijing favours a ‘4 plus 1’ system: the euro, sterling, yen and renminbi, co-existing with the dollar. These are the five constituents of the SDR, which the renminbi formally enters in October, following a US Treasury-endorsed IMF decision in November.
Beijing has upgraded the role of the IMF’s composite currency by starting to publish its foreign reserves total (the world’s biggest) in dollars as well as SDRs. As the People’s Bank of China said on 7 April, this ‘help(s) reduce valuation changes caused by frequent and volatile fluctuations of major currencies, hence providing a more objective measurement of the overall value of the reserves.’
. . . . . . . . 
"The statement was prefigured a few days earlier by Zhou Xiaochuan, the PBoC governor, in Paris reporting that Beijing had decided to publish the SDR reserve data, and intended issuing domestically orientated SDR-denominated bonds, promoting the composite currency’s capital markets use.
Among other initiatives, we can expect SDR pricing for some commodities, bond issues by governments outside China, and improved clearing and settlement for SDR currencies, where Beijing may co-operate with the Belgium-based Society for Worldwide Interbank Financial Communications (Swift) network."

Added note: Here are two more recent articles on SDR's that you might find of interest. The first sent to me by a reader here.

The IMF's Special Drawing Rights, the Renminbi, and Gold

This article notes that the SDR has lost over 80% of its value over time against gold.

SDR Does not stand for Secret Dollar Replacement

This article states the case that the recent statement from China about broader adoption of SDR's is more PR than real substance.

These articles continue to suggest that any replacement of the US dollar by the SDR would most likely be a very slow and gradual process unless another major financial crisis unfolds. The article comparing gold versus the SDR over time suggests that some form of asset or gold backing might be necessary to gain public confidence if the SDR was eventually put forward as a replacement for the US dollar as the leading global reserve currency.

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