Thursday, June 4, 2015

OMFIF: Chinese SDR Inclusion Could Trigger Global Assets Shift

A big thank you to a blog reader from South Africa who sent me this link! This article on the OMFIF web site talks about a possible unintended consequence for China if the Yuan is included in the SDR currency basket later this year (increase in the value of the Yuan might depress the Chinese economy). This is something I have not seen mentioned in other articles on this topic. Below are some quotes from the OMFIF article.


"A large shift of global institutional assets into renminbi could take place if the International Monetary Fund concludes later this year that the Chinese currency should join the Special Drawing Rights, the Fund’s composite currency unit used in official worldwide transactions
Some sizeable moves on world capital markets could take place pre-emptively if opinion hardens in the next few months that the IMF is about to bring the renminbi into the SDR, combining the world’s most important reserve currencies. This could spur further appreciation of the renminbi that could represent another depressant for the Chinese economy, complicating Beijing’s efforts to prevent an unduly sharp slowdown this year.

 A possible conflict between China’s international monetary ambitions, on the one hand, and, on the other, the need to keep the economy on an even keel was highlighted in a seminar on the SDR and the renminbi organised in Beijing on 22 May by the International Monetary Institute of Renmin University and central bank research group OMFIF.
Whether the SDR could or should be expanded from its present four constituents, the dollar, euro, yen and sterling, is being debated at a technical level, ahead of a decision by the IMF executive board before the end of the year.

An intriguing issue is whether this becomes elevated to a political question between the US and Chinese governments. A decision to include the renminbi in what is effectively an association of the world’s top reserve currencies has big implications for financial markets, to which only a few specialists hitherto have paid much attention.
"The general consensus at the Beijing seminar was that, from a technical point of view, the renminbi was probably well on the way to SDR membership. Although many Chinese financial market participants believe the US opposes renminbi inclusion, Washington cannot – even if it wished to – by itself block adhesion. The SDR decision requires a 70% majority on the IMF executive board. The US has the power to veto solely decisions that require an 85% majority.
In addition, the US will almost certainly not wish to risk another potentially embarrassing showdown with China just months after being rebuffed in its attempt to block western countries’ adherence to the China-led Asian Infrastructure Investment Bank." . . . . . 

Added note 8-12-15: This article become even more interesting in light of the recent decisions by China to devalue the Yuan.

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