05-09-2009, 01:39 PM
China began the long journey to a new international reserve currency with a single step - agreeing to buy $50 billion in notes from the International Monetary Fund.
Another proverb, less distinguished than a quote from Daoist philosopher Laozi, also applies here: China put its money where its mouth is.
After calling for a super-sovereign reserve currency to replace dependence on any national currency, China’s leaders have made a concrete commitment toward achieving that far-in-the-future goal.
The IMF announced Wednesday that China had signed an agreement to buy $50 billion in notes denominated in Special Drawing Rights, the IMF synthetic asset which China favors as an alternative to the dollar as the world’s reserve currency. It’s the first such agreement in the history of the IMF.
The news didn’t come as a surprise, as China’s intention had been announced in June. It didn’t have a noticeable impact on markets because immediate foreign-exchange-rate effects are negligible.
Nevertheless, the formal signing of China’s agreement with the IMF is a significant development, albeit at the long-term policy level.
“The IMF’s relevance has returned in light of the financial crisis and this transaction represents a new way forward for the IMF to obtain funding,” wrote Gareth Berry, a currency strategist at UBS in London, in an email note.
Moreover, the purchase of IMF notes gives China the opportunity to increase its influence within the IMF, where it still holds disproportionately small voting power, Berry noted.
With Russia and Brazil on tap to buy similar IMF notes to the tune of $10 billion each, that gives the IMF about a quarter of the $283 billion it needs for SDR reserves. Early this week, the IMF said it had allocated $250 billion and another $33 billion would be added on Sept. 9.
This will increase the outstanding stock of SDRs to the equivalent of $317 billion. If the IMF were a country, it would have the fifth largest foreign-exchange reserves in the world, lagging slightly behind Taiwan but ahead of India.
In a statement on its Web site, the IMF said the agreement will “boost the Fund’s capacity to help its membership - particularly the developing and emerging market countries - weather the global financial crisis, and facilitate an early recovery of the global economy.”
So in one fell swoop, China has accomplished several things. It has shown that it’s serious with its push for reform of the international financial system. It has given SDRs more prominence than ever before. At the same time, it has found a safe parking place for a tiny part of its more than $2 trillion in reserves, one that doesn’t depend directly on the dollar or U.S. government debt.
Perhaps most importantly, China has demonstrated yet again it has considerable clout at the loftiest levels and isn’t afraid to use it in a constructive fashion. It’s backing its rhetoric with $50 billion in action.
–Robert Flint
http://blogs.wsj.com/chinajournal/2009/0...-currency/
Another proverb, less distinguished than a quote from Daoist philosopher Laozi, also applies here: China put its money where its mouth is.
After calling for a super-sovereign reserve currency to replace dependence on any national currency, China’s leaders have made a concrete commitment toward achieving that far-in-the-future goal.
The IMF announced Wednesday that China had signed an agreement to buy $50 billion in notes denominated in Special Drawing Rights, the IMF synthetic asset which China favors as an alternative to the dollar as the world’s reserve currency. It’s the first such agreement in the history of the IMF.
The news didn’t come as a surprise, as China’s intention had been announced in June. It didn’t have a noticeable impact on markets because immediate foreign-exchange-rate effects are negligible.
Nevertheless, the formal signing of China’s agreement with the IMF is a significant development, albeit at the long-term policy level.
“The IMF’s relevance has returned in light of the financial crisis and this transaction represents a new way forward for the IMF to obtain funding,” wrote Gareth Berry, a currency strategist at UBS in London, in an email note.
Moreover, the purchase of IMF notes gives China the opportunity to increase its influence within the IMF, where it still holds disproportionately small voting power, Berry noted.
With Russia and Brazil on tap to buy similar IMF notes to the tune of $10 billion each, that gives the IMF about a quarter of the $283 billion it needs for SDR reserves. Early this week, the IMF said it had allocated $250 billion and another $33 billion would be added on Sept. 9.
This will increase the outstanding stock of SDRs to the equivalent of $317 billion. If the IMF were a country, it would have the fifth largest foreign-exchange reserves in the world, lagging slightly behind Taiwan but ahead of India.
In a statement on its Web site, the IMF said the agreement will “boost the Fund’s capacity to help its membership - particularly the developing and emerging market countries - weather the global financial crisis, and facilitate an early recovery of the global economy.”
So in one fell swoop, China has accomplished several things. It has shown that it’s serious with its push for reform of the international financial system. It has given SDRs more prominence than ever before. At the same time, it has found a safe parking place for a tiny part of its more than $2 trillion in reserves, one that doesn’t depend directly on the dollar or U.S. government debt.
Perhaps most importantly, China has demonstrated yet again it has considerable clout at the loftiest levels and isn’t afraid to use it in a constructive fashion. It’s backing its rhetoric with $50 billion in action.
–Robert Flint
http://blogs.wsj.com/chinajournal/2009/0...-currency/
"The philosophers have only interpreted the world, in various ways. The point, however, is to change it." Karl Marx
"He would, wouldn't he?" Mandy Rice-Davies. When asked in court whether she knew that Lord Astor had denied having sex with her.
“I think it would be a good idea” Ghandi, when asked about Western Civilisation.
"He would, wouldn't he?" Mandy Rice-Davies. When asked in court whether she knew that Lord Astor had denied having sex with her.
“I think it would be a good idea” Ghandi, when asked about Western Civilisation.