Monday, December 15, 2014

Bloomberg on Adding the Yuan to the SDR Basket in 2015

On Tuesday of this week we ran a blog post titled "The Biggest Monetary Issue in 2015 that is Flying Under the Radar".  In that article we noted that the IMF review to determine if the Yuan will be added to the SDR basket of currencies may be that issue. Now Bloomberg runs this article which talks about the same things that we did in our blog article. So perhaps the issue is moving on to the radar? Below are some quotes from the Bloomberg article (please read the full article) and then a comment.


The Yuan Has a Real Shot at IMF Blessing on Reserve Status - Bloomberg

"For the first time, China has a real shot at getting the International Monetary Fund to endorse the yuan as a global reserve currency alongside the dollar and euro."
"In late 2015, the IMF will conduct its next twice-a-decade review of the basket of currencies its members can count toward their official reserves. Including the yuan in this so-called Special Drawing Rights system would allow the IMF to recognize the ascent of the world’s second-biggest economy while aiding China’s attempts to diminish the dollar’s dominance in global trade and finance."
"China would need to satisfy the Washington-based lender’s economic benchmarks and get the support of most of the other 187 member countries. The Asian nation is likely to pass both tests, said Eswar Prasad, who until 2006 worked at the IMF, including spells as heads of its financial studies and China divisions."
. . . . . 
"Approval hinges partly on whether the IMF reverses its 2010 decision that the yuan wasn’t “freely usable.” There’s growing evidence that the currency may now pass this test, after already qualifying on the IMF’s other condition of being a large exporter."
. . . . .
"The IMF said in an e-mailed statement that since the last review, “there have been a number of developments regarding the RMB’s international use, and the upcoming review would take stock of these developments.” The IMF’s board will conduct the review in October after starting with an informal briefing in May, Managing Director Christine Lagarde said in a report published today."
. . . . .
"There’s a “very high chance that the yuan will be included in the SDR,” Nathan Chow, an economist at DBS Group Holdings Ltd. who previously worked at the Hong Kong Monetary Authority. “Both political and economic circumstances are conducive,” Hong Kong-based Chow said."
"The U.S. could potentially veto the yuan’s inclusion in the SDR basket because the change would require the support of as much as 85 percent of voting shares on the IMF’s executive board. The U.S. has 17 percent of the votes. The IMF said it’s too soon to say whether the move would require 70 percent or 85 percent of the vote under the institution’s bylaws".
"Holly Shulman, a Treasury Department spokeswoman, said in an e-mail that it’s too early to speculate on the outcome of the IMF review."
. . . . . 
"SDR status would be a “relatively easy” way for the world to acknowledge China’s economic ascendancy, said Benjamin J. Cohen, a professor of international political economy at the University of California at Santa Barbara. It overtook Japan to become the world’s second-biggest economy in 2010."
It’s very difficult to imagine they won’t include the yuan in the basket,” Cohen said. “China has to be mollified.”
My added comments:
We covered most everything in this article in our blog article, but there are a couple of points of clarification in this article that are helpful. First, this Bloomberg article says that the final determination will be made in October 2015 with an informal briefing to be done first in May. 
Also, this article says it is possible that the IMF will have to get an 85% approval vote to include the Yuan. In our earlier blog article, we did not realize this might be required. However, the IMF comment on this is beyond interesting. They said "it's too soon to say whether the move would require 70% or 85% of the vote under the institution's bylaws."
I find that IMF statement very interesting and it raises some obvious questions:
How would they not know if the bylaws required a 70% or 85% vote on this?
How it could it be "too early" to say? (What does time have to do with it?)
I have to think that the IMF is laying the groundwork here to make sure they get the Yuan in the basket no matter what the US Congress wants to do on this. China and the BRICS nations are already upset that the US is blocking the 2010 reforms that would give them a higher quota in the IMF structure and more influence. 
Imagine if the IMF tries to include the Yuan in the SDR basket and the US Congress tries to use the 17% US vote at the IMF to block it. It looks like to me that the IMF is saying we will get this done even it means interpreting the bylaws in such a way as to lower the voting threshold to 70% (negating the US veto power). Notice the last statement we quoted above in the Bloomberg article, "China has to be mollified." We will follow this story for sure in 2015.

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