China Starts Journey to New Reserve Currency

[Magda Hassan]

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/

[Jan Klimkowski]

China's economists are, effectively, the canaries in the coalmine - able to look at western economies dispassionately.

With one caveat, China has skin in the global financial game. Particularly with regard to its massive American investments.

Crucially for China though, the standard of living of their average citizen is much lower than their equivalents in the west, and China's ability to contain mass public dissent is arguably higher than that of western countries.

With regard to the global ponzi scheme, (um, global financial system), in my judgement future debt has been pulled forward to such an insane extent - in an attempt by the financial elites to screw yet more profit out of a zero sum game - that massive debt default is now inevitable.

It's a game of pass the parcel, with multiple parcels full of excrement, and perhaps only one or two smelling of roses.

The problem for everyone sitting at the table is how to dump the turds and make a fragrant escape.

All the players are watching the Chinese, checking for any attempt to pass the smelly parcels and head for the exit door. If they're spotted doing this, market confidence will probably collapse and a genuine and catastrophic domino effect will likely ensue.

How non-Chinese market players read this will be the key. On the face of things, it does appear that the Chinese are starting to decouple.

I bet all those western financial thinktanks, with their cliched thinking, are reaching for their copies of Sun Tzu right about now.... tupido2:

[Keith Millea]

It's a game of pass the parcel, with multiple parcels full of excrement, and perhaps only one or two smelling of roses.

The problem for everyone sitting at the table is how to dump the turds and make a fragrant escape.

I wish all the economic talking heads would explain things like this.Then just maybe stoopid Americans would figure out who's jammin' them in the butt.:vroam:

[David Guyatt]

This strikes me as being really quite innovative and clever. The Chinese face the problem of not devaluing their two trillion dollar reserves which would be the case if they tried to set up a new global currency. Gradually shifting to SDR's might provide the escape route the need to decouple from the dollar without damaging themselves at the same time. It will be very interesting to see if they are able to wrest a sufficient degree of control from the historically US controlled IMF (one of the two main empire beasts of Bretton Woods). If Russia and Brazil follow suit - and in deed India too - things will become really quite interesting.