This you rarely see in the U.S. MSM, because Wall Street doesn't want Main Street be aware, but here it is in the USA TODAY
China currency push takes aim at dollar
(Photo: AP)
Protests
over democracy in Hong Kong may be preoccupying the Chinese leadership,
but a subject of still greater international importance is being played
out this week behind closed doors in Washington. China is bidding to
enter the heart of global finance by establishing its currency, the
renminbi, as part of an ubiquitous monetary unit used in official
transactions around the world.
The
issue of whether the Chinese should be part of the International
Monetary Fund's Special Drawing Right, the composite reserve currency
used in official financing, is highly technocratic, but the political
questions at stake go to the core of world money and power – and will be
discussed, in the background, at the annual meetings of the IMF and
World Bank in Washington this week.
The
decision on a new SDR structure, to be made in the next 15 months, will
influence how China and its currency can play a bigger part in driving
world trade, investment and capital flows. The renminbi could eventually
challenge the dollar and its pivotal position in world money — which is
why the U.S. government and Federal Reserve are examining this with
intense interest.
China
is unlikely to mount an open campaign to enter the SDR, grouping the
main reserve currencies, the dollar, the euro (linking countries in
European monetary union led by Germany and France), the Japanese yen and
British pound, and is valued at around $1.5.
Beijing
would prefer the question of recalculating the composition of the SDR,
which comes up for review in 2015, to follow market developments,
reflecting a big increase in demand for renminbi financing from private
banks, central banks, traders, corporations and asset managers.
Many
hurdles remain. These include the renminbi's lack of formal
convertibility for transactions that shift capital inside and outside
the country, where Beijing is reluctant to abolish all controls. In
addition, China still has to release more statistics to the Fund about
its monetary reserves and other matters. However, Chinese measures over
the past three years to liberalize and internationalize its currency,
and a big increase in financial market interest in China, are pointing
toward a broadening of the SDR's composition from January 2016.
An
additional factor is China's own action to galvanize emerging market
economies toward reforming word monetary arrangements. This includes the
five-nation Brics group's decision to set up the New Development Bank
in Shanghai, potentially challenging the IMF and the World Bank.
As
the world's No. 2 economy after the U.S., China believes it is close to
earning the status of a reserve money, the first time that an emerging
market currency would attain this position. Chinese entry into the
"magic circle" has been advanced by the British government's September
decision to issue renminbi-denominated bonds, the first big government
to take such a step, and allow the proceeds to be held as reserves by
the Bank of England.
The
main conditions for the renminbi to pass the SDR test are that it
should be widely used in trade and be "freely usable" in international
payments and asset management. Although a long way behind the dollar,
the renminbi has made impressive strides recently and is challenging the
euro in several key fields.
Next
year's planned review will touch, too, on the opportunity for the SDR
to play a greater role on financial markets, for example in denominating
bond issues. The SDR has lost ground as a financial vehicle in the past
two decades, reflecting the surging importance of international private
sector capital markets. But with the addition of the renminbi, it may
be about to make a comeback.
David Marsh is Managing Director of Official Monetary and Financial Institutions Forum, a London think-tank.
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