Tuesday, December 8, 2015

Bloomberg: China Begins G-20 Leadership With Ideas to Reduce US Dollar's Role

Bloomberg runs this new article which directly relates to issues we have covered here on the blog for some time now. The article not only talks about China wanting to reduce the role of the US Dollar as the world's primary reserve currency, it mentions that China and others want to see an expanded role for the SDR used at the IMF. 

On top of all that China says it might be a good idea to add in some commodity pricing to the SDR. Below are some quotes with some key points in bold type, then some added comments.

As China takes the reins of the Group of 20 for the coming year, the first indications are emerging of its agenda.

Among the priorities: making the global system more resilient to shocks and, perhaps, less reliant on the U.S. dollar. China is setting up a working group led by South Korea and France to develop proposals, including on ways to strengthen the role of the International Monetary Fund’s reserve-currency unit, which is set to incorporate China’s yuan as a component next year.

China also wants a discussion around whether some commodities should be priced in the IMF’s reserve currency, known as Special Drawing Right or SDR, according to a European official involved in the G-20 talks.

. . . . 

Giving South Korea and France the job as chairs of the working group offers China some distance from the effort, after past failures to head off the repeated financial crises that afflicted the global economy since the G-20’s 1999 foundation. South Korea said last month that the provisional agenda will include action plans to address capital-flow volatility, sovereign-debt restructuring and ways to enhance the IMF’s unit of account, or SDR.

. . . . .

SDR Inclusion

China’s G-20 chairmanship began at the start of the month, a day after the IMF said the yuan met the requirements for joining the dollar, euro, yen and pound as one of the currencies backing the SDR, a sort of overdraft account for IMF members. China central bank Governor Zhou Xiaochuan in 2009 advocated expanding the use of the SDR unit in calling for a "super-sovereign reserve currency."
Nothing came of Zhou’s call six years ago, and changing the global financial architecture now remains difficult, analysts say.
"We will need another global crisis, and one whose roots can be clearly identified in the shortcomings of the current non-system, for this to happen," said William White, an adviser to the Organization for Economic Cooperation and Development. The G-20’s agenda can also become dominated by pressing issues of the moment.
"I suspect that geopolitical issues will trump economic ones," White said.

My added comments: This sounds like an article that could have been written here on this blog. It talks about China wanting to reduce the role of the US dollar globally, enhance the role of the SDR used at the IMF, and adding a commodity pricing component to the SDR. These are all topics we have discussed here while writing about SDR's. For example. Dr. Warren Coats (former IMF) talked about using a "basket of goods" to value the SDR in his proposal for a "real SDR" which we wrote about here.
To top it off, the article quotes William White of the OECD as saying that we are not likely to see a major change in the monetary system unless we get "another global crisis, and one whose roots can be clearly identified in the shortcomings of the current non-system". That is a point we have made here repeatedly for some time now, so obviously we agree with Mr. White (no relation) on this.

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