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Why Beijing is promoting the SDR

Why Beijing is promoting the SDR

China’s pragmatic multicurrency reserve move

by David Marsh

Mon 11 Apr 2016

China’s utterances over the years on the International Monetary Fund's special drawing rights confirm the Beijing authorities’ delphic reputation for long-term thinking. The mystery is starting to look a little less obscure. China is embarking, pragmatically but steadily, towards enshrining a multicurrency reserve system at the heart of the world’s financial order.

Although it accepts that many years will elapse before the dollar can be dethroned from its No.1 role, Beijing favours a ‘4 plus 1’ system: the euro, sterling, yen and renminbi, co-existing with the dollar. These are the five constituents of the SDR, which the renminbi formally enters in October, following a US Treasury-endorsed IMF decision in November.

Beijing has upgraded the role of the IMF’s composite currency by starting to publish its foreign reserves total (the world’s biggest) in dollars as well as SDRs. As the People’s Bank of China said on 7 April, this ‘help(s) reduce valuation changes caused by frequent and volatile fluctuations of major currencies, hence providing a more objective measurement of the overall value of the reserves.’

The PBoC announcement was coupled with news that China’s reserves for March showed the first rise for five months, with the dollar total increasing by $10.3bn to $3.21tn. This underlined how the doomsayers predicting the renminbi’s wholesale devaluation had got it wrong again.

The statement was prefigured a few days earlier by Zhou Xiaochuan, the PBoC governor, in Paris reporting that Beijing had decided to publish the SDR reserve data, and intended issuing domestically orientated SDR-denominated bonds, promoting the composite currency’s capital markets use.

Among other initiatives, we can expect SDR pricing for some commodities, bond issues by governments outside China, and improved clearing and settlement for SDR currencies, where Beijing may co-operate with the Belgium-based Society for Worldwide Interbank Financial Communications (Swift) network.

Zhou’s Paris proclamation was no coincidence. Zhou is close to Michel Camdessus, former Banque de France governor and IMF managing director. The French capital is the traditional venue for plans (mainly fruitless) to unseat the dollar. These date back to the manoeuvrings of Jacques Rueff, the legendary pre-second world war French economist, and the ill-fated 1960s rebellion against the greenback’s ‘exorbitant privilege’ orchestrated by President Charles de Gaulle and Valéry Giscard d’Estaing, then finance minister, later president.

As long ago as March 2009, Zhou described the SDR as a future ‘super-sovereign reserve currency’, a move seen as a shot across America's monetary bows. Soon afterwards the G20 major economies agreed a $250bn boost to world SDR issuance, the first allocation since 1981.

Zhou and other Chinese officials have long admitted the short-sightedness of building up enormous reserves in a currency China doesn’t fully trust. Over the past seven years, China has tried to mitigate the trend. The renminbi enters the SDR basket as a moderately strong currency, having revalued 5% against the dollar since March 2009, compared with the euro’s 14% depreciation. China has diversified foreign assets away from over-concentration on dollar debt towards increased non-dollar ‘real economy assets’ – ranging from worldwide infrastructure and real estate investments to stakes in European companies.

Creating a new, widely accepted reserve currency was a ‘bold initiative’ and would take time, Zhou acknowledged in 2009. That’s true. The US currency’s share of total currency reserves has grown more than 3 percentage points since mid-2009 to over 64%, according to latest IMF data. The euro’s share has fallen by a precipitous 8 percentage points over the same period, from 28% to 19.9%. The renminbi, probably with around 1% of reserves now, has a long way to go. The SDR and the renminbi together could, over time, compensate for the euro’s fall from grace.

David Marsh is Managing Director at OMFIF.

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