Monday, January 25, 2016

Dr. Warren Coats (former IMF) Calls on AIIB to Use the SDR for "All its Loans"

Recently we did a blog article featuring Dr. Warren Coats 'Real SDR' proposal. Dr. Coats is a former head of the SDR Division at the IMF so obviously we won't find a better source on information related to this topic. Dr. Coats is happy to share his ideas and in a recent email he advised me of a brand new article he has just co-authored with Dongsheng Di (Renmin University of China, Beijing) that readers here will find interesting. 

In the article the authors call on the new Asian Infrastructure Investment Bank (AIIB) to "make all of its loans in SDR's" to help the currency gain broader adoption. Below I have pasted in some selected quotes. I have put some points I felt were significant in bold type, so the emphasis there is mine and not the authors. I strongly encourage all readers to click here to read the full article.


By Warren Coats and Dongsheng Di

Jin Liqun, President of the new Asian Infrastructure Investment Bank (AIIB) announced on January 17, 2016 that all of its loans would be in U.S. dollars, “signaling that Beijing will not use the development bank as a platform to promote renminbi internationalization.” In this note we argue that the AIIB should make all of its loans in SDRs. Doing so would make a major contribution to promoting the replacement/supplementation of the U.S. dollar for international payments that was called for by People’s Bank of China’s Governor, Zhou Xiaochuan in 2009. As the SDR valuation basket will include the Chinese renminbi after October 1, 2016 it will also contribute, but more modestly, to the international use of the renmimbi.

. . . . . .

"The case for creating “private” SDRs to disburse to AIIB loan recipients rests on the contribution it would make toward developing the SDR issued by the IMF into a global reserve asset to supplement or replace the U.S. dollar, Euro and other national currencies in countries foreign exchange reserves.

The development and use of private SDRs, SDR denominated bank liabilities, is described in detail in an article one of us wrote over thirty four years ago in the IMF Staff Papers."

. . . . .

"Thus these central banks would need, in addition to their SDR accounts with the IMF, to establish (private) SDR accounts for their governments and commercial banks."  If the loan recipient is able to spend these SDRs (pay its contractors and suppliers) directly it would do so, but most often it would need to exchange them for the currency wanted by the ultimate recipients. This exchange would most likely be executed by its bank providing the SDR deposit."

. . . . . 

"China and the AIIB are in a strong position, working through the IMF or bilateral discussions, to urge central banks to open private SDR accounts for their governments and their commercial banks toward the fulfillment of their obligation under the IMF’s Articles of Agreement to make the SDR “the principal reserve asset in the international monetary system” (IMF Article XXII)."

.  .  .  .

"as private SDRs and supporting clearing and settlement arrangements proliferated, holding and using SDRs for international transactions would become more convenient and would potentially grow rapidly. This is an opportunity that should not be missed."
My added comments: This article is chock full of important concepts that we have discussed here on the blog. I used bold type above to emphasize that the article is calling for all loans at the AIIB to be issued in SDRs and to emphasize the distinction in the article for "private SDRs".  If private citizens are ever to have the ability to own SDRs, this would be an important first step in that direction. If China and the AIIB did follow the recommendations in this article, we would certainly be seeing some major monetary system change taking place which is what we watch for here. Jim Rickards has said to watch for issuance of SDR bonds in the future, so this is in line with his comments on that. We also noted the lack of SDR bond issuance as a roadblock to broader SDR adoption in this blog article last summer (see point #4). In a brand new Op-ed article in the Chinese edition of The Financial Times, author Willem Middelkoop talks about China and the SDR as well. To read the article in english, hit the translate button.

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