Search for a new currency standard
Chinese authorities targeting SDR stability
by David Marsh and William Baunton
Wed 8 Apr 2015
The Chinese authorities are sidestepping exporters' lobbying and maintaining a firm renminbi, in a targeted effort to show ‘hard money’ credentials during an important review process with the International Monetary Fund that could set a new world currency standard.
In spite of the dollar’s strength on world markets, the People’s Bank of China has continued to shadow the US currency in steering the renminbi’s value this year, increasing its likelihood of joining the IMF’s Special Drawing Right under procedures to be concluded in the next six months. The renminbi's strength has offset the weakness of the euro and the yen, two of the four components (along with the dollar and sterling) in the IMF’s composite currency and unit of account, widely used to denominate official payments and reserves around the world.
If the renminbi had been in the SDR composite currency with a 15% weighting from 2011 onwards, the volatility of the exchange rate would have fallen over the last four years, as can be seen in Chart 1.
Even more significantly, as Chart 2 shows, since December Beijing seems to have been steering the renminbi so that including the Chinese currency would have enhanced the overall SDR level.
In recent weeks the IMF started a formal process to investigate whether the renminbi should enter the SDR by the end of the year, in what would be the first time that an emerging market currency was accorded formal status as a reserve asset. The IMF is examining as important conditions the renminbi’s much-increased use in trade invoicing and reserves as well as whether it is ‘freely usable’ in international payments and asset management. Other indicators include use of the renminbi in international debt securities and bank liabilities, and foreign exchange spot market turnover. In all these areas the renminbi, although constrained by residual capital account restrictions, has made impressive strides in the last two years.
Leading European countries including Germany and the UK have come out broadly in favour of bringing the Chinese currency into the SDR basket. The US, which is anxious to avoid another damaging split with its European allies similar to the discord over setting up the Asian Infrastructure Investment Bank, has indicated it is lukewarm but is not ruling out the step altogether.
Jack Lew, the US treasury secretary, said last week China had to carry out further ‘liberalisation and reform’ of its currency regulations before it could enter the SDR, a process he said he encouraged and which Chinese officials say is on track.
Using similar methodology to the IMF, OMFIF has carried out informal calculations adding the renminbi to the composite currency unit basket at 5%, 10% and 15% of the total, proportionally decreasing the other constituent currencies. The 15% percentage appears, broadly, closest to the level the IMF would eventually choose should it decide in principle to allow the Chinese currency to join.
Beijing’s action to keep its currency stable has propelled the Chinese currency to a real (inflation-adjusted) trade-weighted appreciation of 14.8% during the past 24 months, according to Bank for International Settlements data, as can be seen in Chart 3. This exceeds the 11.6% real appreciation of the dollar. The intervention reinforces the Chinese authorities’ attempts to maintain favour with important foreign holders of renminbi, including many international central banks.
The resulting loss of export competitiveness appears a secondary consideration – especially since a stronger currency is aligned with the Chinese authorities’ design to rebalance the economy away from undue dependence on exports and towards a domestic consumption model that favours cheaper imports over exports.
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