Sunday, June 11, 2017

Benjamin Cohen: Should China be Ejected from the SDR?

Benjamin Cohen writes this new article published on Project Syndicate. Clearly, he is not a big fan of the Chinese handling of its currency. He says he doubts if the Yuan should have been added into the SDR currency basket last year and also thinks the IMF should consider taking it out. Below are a couple of excerpts and then a few added comments.


Should China Be Ejected from the SDR?

"Last week, the Chinese government tightened its grip on the renminbi’s exchange rate. China has now effectively reneged on a promise it made 18 months ago, when it lobbied its way into the basket of currencies that determines the value of the International Monetary Fund’s synthetic reserve asset, the Special Drawing Right (SDR).

China’s latest move will hardly strengthen confidence in its currency. As some of us warned at the time, the renminbi’s admission to the SDR basket was a highly political decision that could have adverse long-term consequences."

. . . . .

"It is not difficult to understand why China has reneged on its promises. Over the past two years, newly affluent Chinese citizens have been seeking ways to move their wealth abroad. This has increased downward pressure on the renminbi, and has forced the PBOC to spend more than $1 trillion in foreign-exchange reserves to prop up the exchange rate. And yet that still wasn’t enough to prevent Moody’s Investors Service from downgrading China’s credit rating earlier this month, leaving policymakers on the defensive."

. . . . .

"Looking to the future, there is only one solution. The renminbi should be removed from the SDR, unless China can make credible commitments to pursue serious and permanent financial liberalization."

My added comments: This is an interesting article in regards to what we cover here for a couple of reasons. 

1) I constantly read articles proclaiming that the Chinese Yuan is on a path to replace the US dollar as global reserve currency. However, just a little research indicates that the Yuan is nowhere near doing anything like that even though it did add prestige by being included in the SDR basket last year. Even Chinese officials do not talk in terms of the Yuan replacing the US dollar. Instead, some Chinese officials have called for the SDR to replace the US dollar. Clearly, it was very important to China to get the Yuan added into the SDR basket as a means to improve the global image for the Yuan. Can you imagine how they might react to having it taken back out of the basket? That would be an enormous slap in the face. At least for now, it appears that being "accepted" at the IMF club is more important to Chinese officials than any ideas for trying to use the Yuan to replace the US dollar outside the SDR.

2) This article illustrates how that there is not nearly as much global consensus as many may think among those we would normally view as "elites". Here Benjamin Cohen voices his view that the Yuan probably should never have been added to the SDR basket and thinks taking it back out should be viewed as an option at the IMF. These kinds of internal battles go on all the time inside these organizations and as best I can tell there is far from any real "global consensus" for now on any plan to replace the US dollar as global reserve currency. I still believe that is unlikely to change until and unless a new major global financial crisis forces a move towards more consensus. Without that, it's more like trying to herd a group of cats. You can take a nice picture of a group of cats, but after the picture is taken, they tend to each head off in different directions.
Added note: In this interview with Kind World News, Dr. Stephen Leeb expresses the view that China will eventually replace the US dollar with the Renminbi and also that they will back it with gold. As I mentioned above, I see this idea quite a bit and there are some Chinese who have talked in terms of the idea of a gold backed currency. But so far, China has not made any public move to indicate such a thing is on the near term horizon and they have worked hard to gain acceptance in the SDR currency basket. 

Jim Rickards believes China is building up gold reserves to hedge their large US dollar position and to have a seat at the table with the other nations who hold large gold reserves whenever the next global monetary conference takes place (this would be a reset like we watch for here). The available evidence for now seems to suggest China is more interested in promoting the SDR as a reserve currency to replace the US dollar rather than the Renminbi as best I can tell. But I remain open to all possibilities and will follow it over time like everything else related to potential monetary system change.

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