Tuesday, May 26, 2015

The Irresistable Rise of the Renminbi

This article appearing on Project Syndicate is one of the better ones I have seen on the future for the Yuan/Renminbi. The Korean author is a former executive for the Asian Development Bank (ADB) and also an economic adviser to the former President of South Korea. Below are some quotes from this excellent article and then a few added comments.


"By the end of this year, the International Monetary Fund will decide whether the Chinese renminbi will join the euro, the Japanese yen, the British pound, and the US dollar in the basket of currencies that determines the value of its international reserve asset, the Special Drawing Right (SDR). China is pushing hard for the renminbi’s inclusion. Should it be admitted?

The IMF created the SDR in 1969 to supplement existing reserve currencies, thereby providing the global financial system with additional liquidity. As it stands, the SDR’s role remains largely limited to IMF operations; its share in global financial markets and central banks’ international reserves is negligible. Nonetheless, adding the renminbi to the SDR basket would be symbolically important, implying recognition of China’s growing global stature. The renminbi is already a major currency for world trade and investment, and accounts for a growing share of international financial transactions and reserve holdings.

To qualify for inclusion, the Chinese government has eased its capital controls and liberalized its financial markets considerably. Inclusion in the SDR basket would require continuing this process, which, together with the renminbi’s emergence as a globally investable currency, would benefit the entire world economy."

. . . . 

"Even if China manages to mitigate such risks, unseating the US dollar as the dominant global currency will be no easy feat. Inertia favors currencies that are already in use internationally, and China lacks deep and liquid financial markets, an important precondition that any international reserve currency must meet. Furthermore, China’s banking system, which remains subject to extensive government control, lags far behind those of the US and Europe in terms of efficiency and transparency."

. . . . 

"History suggests that a shift in global currency dominance is likely to occur gradually. For now, China is focused on winning the renminbi’s inclusion, even with a small share, in the SDR currency basket."

My added comments:

Every time we see high ranking officials talk about this issue, we see some similar patterns show up. In this case we have a high level Korean official. I hi-lighted in bold type above the key points we see over and over again. Let's make a quick bullet point list:

- China very badly wants the Yuan added into the SDR currency basket (versus China intends to leave the IMF and back the Yuan with gold on its own)

- China wants this so badly that they are making many concessions to the US and EU to open up their system (does not sound like someone ready to abandon the IMF)

- China is not trying to overthrow the US dollar as primary global reserve currency any time soon (and in fact is not in a position to to that anyway)

- China sees the promotion of the Yuan/Renminbi as a very long term process that will take years or decades to unfold

I know that there are many respected analysts who believe that China has some kind of secret plan to suddenly overthrow the US dollar and the IMF/World Bank. I see this idea all over the internet. Recently (as we have reported here on the blog) there are articles suggesting that China has secretly amassed well over 10,000 tons of gold (some even say as much as 30,000 tons - see note below) with the intent to use this gold to take down the US dollar. Some see this happening as early as this year or certainly by next year.

I won't dismiss any theory at this point since there are many respected analysts who hold to this view to some degree. All I can say though at this time is that when you see these central bank and government officials talk about all this, they do not support that theory. They all talk about China being involved in a long term process to expand the influence of the Yuan within the present system (at the IMF using the SDR). They talk about this process taking many years with the earliest dates for significant change being around the year 2020. They talk about the process taking a decade or more. They do not talk about China using the gold they are buying to back the Yuan outside the present system on an actual gold standard.

There is no way I can possibly know what China will actually do. I don't think there is any way that anyone can know for sure what China will do except Chinese officials. In addition, they have their own problems to contend with with debt problems domestically and keeping growth going.

All any of us can do is follow events with an open mind. Until proven otherwise, the evidence I see is that what I have reported here on the blog agrees with what this Korean official is saying in this article. That being that China intends to work within the present system with the IMF and their plan is very long term. In addition. this view supports what Jim Rickards has said about China and its plans for its gold as well. For now the new BRICS bank and AIIB appear to be intended to complement the IMF and World Bank. They would also provide a kind of backup system if the present one failed in another big crisis.

If the situation changes, we will cover it here. For now, I take the statements of all these officials in charge at face value and assume they represent the true situation in regards to what China wants to do. Anything else is speculation as best I can tell.

Update note: Respected Chinese gold analyst Koos Jansen is challenging the credibility of  the source of the recent media reports about China perhaps owning 30,000 tons of gold. You can read his article by clicking here.

1 comment:

  1. As Rickards has pointed out, China needs a deep, liquid bond market for the Yuan for it to function as a reserve currency. Its no where near that point.