Thursday, March 26, 2015

China Daily: China Working Hard to Meet IMF Requirements for the Renminbi

We continue to follow this story about China working hard to get the IMF to accept the Yuan/Renminbi into the SDR currency basket later this year. There is popular view that China is planning to usurp the IMF and that the recent news that the UK and other US allies are joining the Chinese led development bank means they intend to abandon the IMF and the World Bank.

However, this is a misreading of the situation in our view here. China continues to make it clear that they badly want IMF approval to add the Yuan/Renminbi into the SDR basket as this China Daily article explains. In addition, the IMF has repeatedly said they endorse the new Chinese bank and don't view it as a threat to the IMF in the future. So what is going on? Let's look at.

I think the key to understanding what is really going on between China and the IMF is to realize that there is no agreed upon "US" position regarding the IMF reforms. While the US Administration made some mild protests about its allies joining the new Chinese bank, the real battle is between the US Congress (under GOP control) and just about everybody else involved with the IMF.

The Obama Administration, the IMF, and the BRICS nations all agree that they want to see the US influence reduced and the BRICS influence increased at the IMF. For that matter, most of the other nations at the IMF have approved the IMF reforms granting more influence to the BRICS nations and especially China.

It's really only the US Congress who refuses to go along with the idea. The recent visit by Christine Lagarde to China illustrates that they are getting along just fine and mostly want the same things. In the China Daily article you notice that China views itself as having to get the approval of the IMF for its currency to be included into the SDR basket. As they have said for years, they are working hard to meet the requirements to do that. There is certainly no suggestion at all they plan on leaving the IMF to go it alone as some seem to believe.

With the other US allies joining the new Chinese led bank, it sends a message to the US Congress. Several media articles on this news have repeated that message. The message is that the rest of the world is moving forward with or without approval of the US Congress. So they suggestion is that they might as well give up their resistance and approve the IMF reforms so that the US will retain its status and veto power at the IMF.

How all this plays out will surely be interesting to follow. I don't know if the US Congress will back down, but I do think the Yuan/Renminbi will get added to the SDR basket regardless. We'll follow it and see what actually happens. 

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