Speeding financial reforms pave way for yuan’s SDR entry

 

 

 

Chinese Premier Li Keqiang (right) meets with Christine Lagarde, managing director of the

International Monetary Fund (IMF) in Beijing on March 23, 2015.   Photo by Pang Xinglei

 

Chinese Premier Li Keqiang (right) meets with Christine Lagarde, managing director of the

International Monetary Fund (IMF) in Beijing on March 23, 2015.   Photo by Pang Xinglei

 

 

 

 

 

BEIJING  |   2015-03-26 18:31:22

 

Speeding financial reforms

pave way for yuan’s SDR entry

 

By Cheng Jing and Guo Xinfeng

 

 

China’s financial reforms have raised the possibility of yuan’s (RMB) inclusion in the IMF Special Drawing Rights (SDR) basket.

In a recent meeting with IMF Managing Director Christine Lagarde, Chinese Premier Li Keqiang reiterated his hopes for the yuan, promising to play an active role in maintaining international financial stability.

Created by the IMF in 1969, the SDR is an international foreign exchange reserve asset comprised of a weighted basket of four currencies — U.S. dollar (41.9 percent), euro (37.4 percent), British pound (11.3 percent) and Japanese yen (9.4 percent).

Allocated to IMF members on the basis of their contribution to the fund, an SDR represents a claim to foreign currencies for which it may be exchanged in times of need.

The value of a country’s total exports and imports, as well as whether a currency is fully convertible under the capital account, are taken as two key criteria for SDR entry.

The IMF reviews the currencies in the SDR basket every five years. At the last SDR review in 2010, the yuan met the first criterion, but was assessed as not meeting the “freely usable” criterion.

Since then, there has been serious progress on widening the global reach of the currency: expanding investment quotas, increased cross-border settlement, and the launch of the Hong Kong-Shanghai Stock Connect scheme.

The RMB became the world’s No. 2 currency for trade finance globally in 2013, and overtook the Canadian and Australian dollars to enter the top five world payment currencies last year, according to global transaction services organization SWIFT.

THe RMB has also been used as a reserve currency in some other countries outside China.

While meeting delegates at the China Development Forum, central bank governor Zhou Xiaochuan pledged to accelerate reform and opening up of its capital market in 2015, with an aim to make the Chinese yuan convertible on the capital account.

The rules on two-way cross-border investment by individuals will be eased and the capital markets made more friendly to cross-border fund-raising.

“The comment demonstrated Beijing’s strong commitment to accelerate financial reforms and achieve full capital account convertibility in 2015, which should increase the chance for the RMB to be included in the IMF SDR basket in the forthcoming review,” noted a report from HSBC global research.

BofA Merrill Lynch global research estimated the potential weighting of yuan in the basket at approximately 13 percent.

“We believe the RMB’s SDR entry and official status as a reserve currency would further legitimize and accelerate its acceptance as an investment destination for foreign investors,” the report said.

This will not necessarily translate into direct yuan appreciation as it will be accompanied by a liberalization of domestic capital outflows, it added.

 

 

 

 

 

 

 

COMMENTARY  |  2015-03-27 22:20:21

 

Transparency of strategy

to replace strategic deterrence 

 

By Yu Zheng

 

 

In Joseph Schumpeter’s theory of economic innovation, creative destruction revolutionizes the economic structure from within, incessantly destroying the old order and creating a new one.

In some eyes, the widely discussed Asian Infrastructure Development Bank, initiated by China, is the latest endeavor designed to disrupt the status quo of global financial governance, even though China, the foremost patron of this new multilateral monetary mechanism, rules out possibility of knocking over the chessboard.

The proposed novice bank, with a start-up capital of 100 billion U.S. dollars, has neither intention nor resources to challenge the World Bank or the Asian Development Bank; much as the existing world economic order, shaped by the U.S.-dominated Bretton Woods agreement seven decades ago, has nothing to fear from China.

Since the end of World War II, power has remained largely within the framework designed by U.S. President Franklin D. Roosevelt, whose architecture aimed to tame the desire of expansionists with the interest of a common community.

One socioeconomic implication of China’s opening up, which began in the late 1970s, was its open willingness to embrace the post-WWII international mechanism, which also substantively benefits China.

Poverty reduction and infrastructure building in China, which lacked financial support 30 years ago, were significantly improved by the loans of the World Bank and the Asian Development Bank.

China recorded its fastest growth after joining the World Trade Organization (WTO) in 2001, catapulting itself to the world’s second largest economy in calculation of gross domestic product (GDP).

The WTO membership requires indiscriminate commitment to the Agreement on Trade-related Aspects of Intellectual Property Rights. Adherence to this facilitated China’s evolution from a country with little exposure to the Western-grown idea of intellectual property to the huge economy it is today, which filed the third most patent applications in 2014 under the international treaty of patent cooperation.

Multilateral climate talks on unharnessed greenhouse gas emissions and relevant international mechanisms encouraged China to reflect on its development mode, which had followed the traditional route of most industrialized economies, to the pursuit of a greener and more sustained path.

China looks to the institutionalized world to improve its governance capability, and tries to inform the modern sophistication of its own system.

Even though there is no incentive for China to topple the existing structure, this does not mean full satisfaction.

It is quite reasonable for an ever greater global contributor to ask for a fairer place on the world playing board.

With the rapidly increasing weight that the Chinese currency exerts on international goods and services trade, China wants the yuan to be included in the International Monetary Fund (IMF) Special Drawing Rights basket of reserve assets, alongside the dollar, the euro, the yen and the pound.

Incumbent powers are usually wary of newcomers, which could be exemplified by the United States. An IMF reform on granting more voting rights to emerging economies, primarily China, has long been stalled by U.S. Congress regardless of the approval of America’s allies.

Any endeavor to revise the current mechanism, which might pose a threat to the U.S. dollar’s supremacy, would be undermined, one way or another, by American strategists. Such mercilessness was also shown to the euro and the yen.

The yuan’s resolve of winning a hard currency position, featuring floating exchange rate and free inbound and outbound flows, might be realized painstakingly.

The U.S. itself often complains about the international pattern, which it predominantly built and advocates, for being static and outdated, and asks international organizations to make instrumental revisions.

With a zero-sum game perception in planning the reform, however, the U.S. is eagerly beefing up its own competitiveness by sabotaging the benefits of others, an obsolete mentality.

One merit of the sharing economy today is the public’s accumulated satisfaction of acquiring despite possible GDP shrinking.

A political assumption might be derived from a new economic law: A grand strategy could be based on passive compromise to active inclusiveness, rather than vacillating between containment and engagement.

China is now proposing a relationship reflecting such inclusiveness between major powers, whose structural rivalry has, historically, been a destabilizing source.

The non-conflicting and non-confrontational relationship, which China advocates, embodies mutual respect, shared success and accommodation of each other’s core interests.

The core interests of both the U.S. and China are extended to unconventional areas — terrorism, organized violence, money laundering, public health crisis, air pollution, ecological deterioration and cyberspace security — none of which could be addressed by coercive forces or by unilateral operations.

Despite the fact that major powers’ agenda always make the pace of global priorities, a fairer international pattern should ensure equal rights to development, particularly for developing nations that are on the weaker side of a feeble equilibrium.

The hurried push for the unfair carbon trade scheme, for example, would offer a great advantage to industrialized nations at the cost of developing economies and, consequently, adversely impact on disadvantaged people’s right to development.

One root cause for keeping such unfairness can be traced back to the superior mindset of warding off heathens, who were singled out on the basis of religious and ideological divergence, wealth disparity and color. Why is it that the world, although more civilized and diverse than ever, is still be divided by this “us vs. you” mentality?

Schumpeter’s gale may or may not be applicable to the international power game, but everyone on the chessboard needs to think about how to face a shared community.

The victory of today cannot be secured by dropping one or two atom bombs, or by winning the space races. Persuasion and attraction are more effective than shock and awe.

Both the U.S. and China have the chance to show the international community how to use their strengths and powers, mercifully and restrainedly.

 

 

 

 

 

 

 

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