China, Currency, SDRs
March 2009, in a speech entitled Reform the International Monetary System, Zhou Xiaochuan, the governor of the People’s Bank of China came out in favour of Keynes’s idea of a centrally managed global reserve currency. Dr Zhou argued that it was unfortunate that part of the reason for the Bretton Woods system breaking down was the failure to adopt Keynes’s bancor. Dr Zhou said that national currencies were unsuitable for use as global reserve currencies as a result of the Triffin dilemma – the difficulty faced by reserve currency issuers in trying to simultaneously achieve their domestic monetary policy goals and meet other countries’ demand for reserve currency. Dr Zhou proposed a gradual move towards increased use of IMF special drawing rights (SDRs) as a centrally managed global reserve currency. His proposal attracted much international attention. In a November 2009 article published in Foreign Affairs magazine, economist C. Fred Bergsten argued that Dr Zhou’s suggestion or a similar change to the international monetary system would be in the United States’ best interests as well as the rest of the world’s.
March 2011The creation of a global currency is a project that would restore a needed coherence to the international monetary system, give the International Monetary Fund a function that would help it to promote stability, and be a catalyst for international harmony… The benefits from a world currency would be enormous. Prices all over the world would be denominated in the same unit and would be kept equal in different parts of the world to the extent that the law of one price was allowed to work itself out. Apart from tariffs and controls, trade between countries would be as easy as it is between states of the United States. – Robert A Mundell, Nobel Laureate in Economics, China G-20 Seminar, Nanjing PRC, March 31 2011.
February, 2016. We welcome the completion of the IMF’s 2015 Review of the Method of Valuation of the Special Drawing Rights (SDR) and support further work to examine the possible broader use of the SDR and on local currency bond market. G20 Finance Ministers and Central Bank Governors Meeting. Shanghai,
Chinese Renminbi to be Identified in the IMF’s Currency Composition of Foreign Exchange Reserves. IMF Press Release No. 16/90 March 4, 2016
British economist and preeminent currency expert, John Maynard Keynes, lived and prospered through the Indian currency crisis and the fall of the pound sterling. At Bretton Woods he warned the US Treasury about the intolerable strains that internationalization places on domestic currencies. The short-term priviliges of an internationalized dollar would come with a long-term curse. Sooner or later, he warned, “you won’t be able to reconcile domestic policy with your foreign commitments. You’ll choose, eventually, the US economy and you’ll lose your empire as as we lost ours”. Keynes encouraged them to adopt a synthetic settlement currency he called the Bancor. Today the Bancor, renamed the SDR, is getting another look from the US Treasury. Having stretching the dollar to its limit, they’re listening to the Chinese and revisiting Keynes’ advice.
Remember ten years ago when our media were full of demands that China let its currency float on the open market the way manly currencies do? Oh, those golden, hegemonic days! Now China is making the renminbi fully convertible and the US is having second thoughts. Relax. China foresore the day when its currency would take a piece of the international apple pie and upset the currency cart. Here’s the background from The Financial Times’ indefatigable Geoff Dyer, in Beijing, reporting after the GFC left the financial world reeling:
Right now, there’s not much Chinese currency in central banks’ vaults, but they’ll soon allocate an average of 20 percent of reserves to RMB. Someone’s going to have to make space for the new kid and our media suggests it’ll be a win-lose battle with the US dollar.
China has no interest in rivalry. China prefers win-wins and it’s got a fascinating proposal for the overstretched US dollar: to make SDRs the first global currency.
What’s more, the US Treasury is going along with China’s plan.
You heard it here first: The United States Treasury has embraced SDRs. Well, embraced may be a little strong. But certainly gone along for the ride. The Indispensible Nation is – reluctantly – admitting that dollar hegemony is over.
It all started after the GFC when the Governor of the People’s Bank of China said, “During the reform of the exchange rate regime, we will significantly enhance the reference to a basket of currencies. But this does not mean pegging to a basket, as there are many other factors influencing the exchange rate. Though pegging to a basket of currencies would better guide market expectation and market understanding of exchange rate movements, there will also be difficulties. First, there is an issue of how to incorporate the impact of macroeconomic data releases. Second, how to demonstrate that market supply and demand is the basis, as the force of market supply and demand should be given more consideration if it points to a different direction from that shown by a basket of currencies. Third, how to choose the weight of a basket of currencies, as there is no consensus. It can be a trade-weighted basket, an SDR basket, or baskets with other weighting methods. Different baskets result in different indices. It will be a gradual process to enhance the reference to a basket of currencies. Now three yuan exchange rate indices have been released, and the future design of the regime will be adjusted according to macroeconomic developments and market supply and demand.”
Here’s Former Treasury Secretary Tim Geithner’s response to the Governor’s proposal: “I haven’t read the governor’s proposal. He’s a remarkably — a very thoughtful, very careful, distinguished central banker. Generally find him sensible on every issue. But as I understand his proposal, it’s a proposal designed to increase the use of the IMF’s special drawing rights. And we’re actually quite open to that suggestion. But you should think of it as rather evolutionary, building on the current architectures, than, rather than, rather than moving us to global monetary union.”
The Chinese Central Bank promised years ago that it woul move to full convertibility – long before anyone imagined that, when the blessed day arrived, the RMB might be considered an attractive alternative to the dollar. Yet as the dollar continues is precipitous loss of value – 75% in the past 10 years according to Tullet Prebon – and the renminbi continues strengthening, the RMB’s attraction strenghtens. Analysts are already talking of the renminbi challenging the dollar and licking their lips over a currency war.
China has a win-win agenda to stabilize our rickety international financial system. It takes the pressure off any single currency to act as global currency and relieves the inherent distortion this creates upon the issuer’s internal politics. There have been times the US Government needed to intervene in the domestic economy but was frustrated by the ‘duty’ of the US dollar to absorb other countries’ losses.
For the past 10 years China’s finance ministry have been advocating, implementing, and test-driving SDRs. First by getting international support for them by making SDRs a focus of the G20 group of world treasurers in 2008 and again in 2015.
We might expect to see the dollar, euro, and yen renminbi each providing 20% of the basket and other currencies the remainder.
From China’s point of view this accomplishes two goals: it bumps the dollar off its perch without breaking it, and eases the renminbi into circulation without starting a currency war.
Now all they have to do is wait for the opportunity to move SDRs center stage…
G20 Finance Ministers and Central Bank Governors Meeting
Shanghai, February 27, 2016: We stress the importance of an adequate and effective global financial safety net (GFSN) and look forward to discussing the IMF’s analysis on the GFSN architecture in April. We welcome the completion of the IMF’s 2015 Review of the Method of Valuation of the Special Drawing Rights (SDR) and support further work to examine the possible broader use of the SDR and on local currency bond market.
And here’s a useful video: