Wednesday, February 4, 2015

Do the BRICS want out of Western Led Global Institutions (UN and IMF)? Part I

One of the most passionate debates you see when you follow what we do here on the blog is the question of what the true goals are for China and the BRICS nations. One side of the debate sees all the apparent conflict between Russia, China, and the US and concludes that the BRICS/China plan is to abandon the IMF and overthrow the US dollar. Some even say they are working on a new gold backed yuan currency that will replace the US dollar. They base this on the massive gold buying by China.

The other side takes the view that BRICS/China have no plans at all to abandon the IMF or  replace the US dollar. They see China supporting the SDR at the IMF as an alternative to the US dollar in the future. They see the Chinese buying gold too, but say it's just to re-balance world gold reserves to get China caught up with the rest of the world.

Meanwhile, 99% of the public doesn't even know the debate is taking place or why they should care about it. Let's explore it.


The one thing both sides can agree on that is pretty easy to document is that China/BRICS do want to an end to the US dollar as the only global reserve currency. These article links provide just a sample of the overwhelming evidence that this is a goal for China/BRICS.

China aiming for de-Americanized World - UK Telegraph

China's Bid for Global Yuan gains Momentum - Wall Street Journal

China: Turning Away from the Dollar - Financial Times

It's easy to establish that China/BRICS don't like the status quo and want things to change. The real debate is how, and over what time frame, they want things to change. The Economist even held an online debate over this question. 

Jim Rickards has proposed that the SDR used at the IMF is more likely to replace the US dollar as the sole global reserve currency. He does not think that China/BRICS want to use the Yuan to replace the dollar as many are proposing. He explained that view in this interview back in 2013 as follows:

"Rickards echoed this.  China is not buying gold to create a new gold standard; rather it is aiming to make the Yuan more attractive, with the end result of being included in a basket of currencies, referred to as the Special Drawing Rate (SDR). He added that there is a move to make the SDR the new global reserve currency."
“Everybody knows that the U.S. dollar’s days are numbered but there is really no currency to take its place except for the SDR,” he said. “What the world is trying to do is move to the SDR and China is fine with that.”

This view held by Jim Rickards stirs up passionate disagreement from those who do not see the SDR at the IMF as playing a major role in the future. You can see that on full display in this article. Here is a quote from this article.

"I have always believed that China and Russia would never accept an IMF SDR as the global reserve currency, even if the U.S. and EU were willing to put those two respective currencies in the basket.  The biggest clue for me has been the rate at which both China and Russia are accumulating gold in their currency reserve accounts and working to eliminate the use of the dollar in their trade agreements."

Clearly, those who are interested in this debate have some strong feelings about it. Just for the record, I don't agree with the personal attack on Jim Rickards in this second article that disagrees with his view on the future of the SDR. I have found Jim Rickards to be quite genuine in email replies to any questions I may ask. I think he provides his honest personal opinion when he discusses these issues, and he is always very courteous as well. In addition, he supports his views with solid documentation that you can verify independently.

In an article I wrote published on January 1st of this year, I listed four possible future scenarios for how the monetary system could change. One of those four was this one:

"A Global Split Between East and West Leading to Competitive Based Change -  In this scenario, the BRICS nations are unable to get what they want within the existing  global financial institutions led by the West (like the IMF and World Bank). They eventually become frustrated and exit those institutions completely and work on building up their new BRICS Bank and Reserve Fund to directly compete around the world with the Western led institutions."

I listed this scenario as possible, but also added this comment:  

"I think this scenario is unlikely, but is possible if political stalement endures for a long time  in the US."

The first scenario I listed was this one:

"Sudden Global Financial Crisis Leading to Rapid System Change – This is basically the forecast of Jim Rickards. It says that we will experience another major crisis sometime soon (say in the next 2-3 years) because the present system is unstable. The US Fed will be unable to deal with this crisis because it will be too big and they have already used up their balance sheet. The IMF would intervene as global lender of last resort and also institute the SDR as a new form of global money.  Jim Rickards explains this view in detail in his book “The Death of Money”

So both sides of this debate were represented in my list of potential scenarios. I also listed another variant of the "Sudden Financial Global Crisis" scenario just above. It is one where the world still ends up using the SDR. However, the process unfolds in a gradual, more controlled manner over the next several years (not under crisis conditions).

So, which side of this debate is right?  What are the real goals for China/BRICS? 

I don't know. That is why I am following it here on the blog. To see how it turns out. And it is important to all of us how it turns out. A change away from the US dollar as sole global reserve currency will impact everyone all over the world. The re-introduction of an actual gold backed currency (the Yuan or the SDR) would have an enormous impact.

Right now, it seems like China/BRICS do not plan to leave the IMF or replace the US dollar with a gold backed Yuan currency. The evidence I see in doing research for articles on the blog indicates that China/BRICS real goals are to 1) stay inside the IMF, 2) work to get the Yuan included in the SDR basket, and 3) eventually push for the SDR to replace the US dollar as the global reserve currency. This does agree with what Jim Rickards is predicting as I understand his forecast. 

This has been the consistent position of China for many years now (see list of links below for some documentation). I do not find any articles quoting Chinese officials saying they intend to leave the IMF or setup a gold backed Yuan currency on their own.

I always reserve the right to change my mind if the facts change. If China and the BRICS are really planning to abandon the IMF and set up a new gold backed currency, that will become very evident over time and we will cover that here. But for now, the evidence we see points in the other direction. You can review some of that evidence just below. 


Evidence that China wants to stay in the IMF and use the SDR in the future:

Reuters - China wants Yuan in SDR in 2015

"Chinese currency authorities are pushing for the yuan to be included in the SDR's currency basket, and are aiming for its inclusion when the basket composition comes up for review again in 2015. . . "

ABC News - China calls for new global currency

"To better insulate countries from the ills of one country or one currency, Zhou (China Central Bank Head) said the IMF should create a "reserve currency" based on shares in the body held by its 185 member nations, known as special drawing rights, or SDRs."

USA Today - China Currency Push

"China is bidding to enter the heart of global finance by establishing its currency, the renminbi, as part of an ubiquitous monetary unit (the SDR) used in official transactions around the world."

China Daily - China eyes SDR as global currency

"China's central bank chief on Monday proposed a sweeping overhaul of the global monetary system, outlining how the dollar could eventually be replaced as the world's main reserve currency by the Special Drawing Right (SDR)."

China Daily - Replace Dollar with Super Currency

Bloomberg - China's Zhou - Some Countries now using the Yuan as reserves

"The inclusion of yuan in the currency basket of Special Drawing Rights, or SDR, the IMF’s unit of account, will happen when conditions are right, PBOC deputy governor Yi Gang said yesterday in Washington. “A canal is formed when water comes,” Yi said, using a Chinese idiom. The basket currently is made up of the dollar, euro, pound and yen."

For those who like to dig deeper, use these links:

US Treasury - US-China Joint Fact sheet

"The United States and China commit to continue strengthening their cooperation in the IMF and G-20, improving the IMF’s quota and governance structure, ensuring the completion of the 15th general quota review, reaching a final agreement on a new quota formula, and further enhancing the voice of emerging markets and developing countries.  The United States commits to complete the domestic approval of the 2010 IMF quota and governance reforms as soon as possible.  The two sides reaffirm the importance of maintaining a strong and adequately resourced IMF."

CIGI paper: China's Goals in the G20

"Furthermore, China is actually not seeking to completely overhaul the international financial system, but rather working toward greater integration and becoming an equal member. As Pang (2013) argues, “China’s strong interest in raising the quotas at the IMF and putting the RMB into the SDR basket show that China is not seeking to create an alternative in global governance, but embracing strongly the existing regimes in global governance.”

The author of the CIGI paper noted just above is Alex He. Here is some info on his background:

Xingqiang (“Alex”) He is a CIGI visiting scholar. Alex is a research fellow and associate professor at the Institute of American Studies at the Chinese Academy of Social Sciences (CASS).  Alex has co-authored the book A History of ChinaU.S. Relations and published dozens of academic papers and book chapters both in Chinese and English. 

He also periodically writes reviews and commentaries for some of China’s mainstream magazines and newspapers on international affairs. Alex has a Ph.D. in international politics from the Graduate School of CASS. Before beginning his Ph.D., he taught international relations at Yuxi Teachers College in Yunnan Province, China.


Additional worthwhile reading on this topic on the Bretton Woods web site: Yuan for all

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