LAWRIE WILLIAMS: China, the SDR and gold. Eroding dollar hegemony.
Yuan acceptance into SDR a foot in the door
Last week’s announcement by the IMF that the Chinese yuan (or renminbi) would be included in the Special Drawing Right (SDR) basket was almost immediately followed by a number of statements from economists that the effects would be minimal in terms of acceptance of the yuan as a global reserve currency. We don’t think so!
As a centrally planned economy, China has the potential to move quicker than the West. Given the importance Chinese politicians have placed on the yuan’s acceptance into the SDR basket, we suspect that, now that has been achieved, it has a game plan for yuan internationalisation which will see this happen far faster than Western commentators might envisage. Indeed a significant part of the groundwork towards achieving this aim had already been accomplished before the IMF decision was announced. A foot in the door in terms of acceptance into the SDR could be a major boost in its attempts, not necessarily to replace, but reduce the role the U.S. dollar currently plays in global finance.
This will have been in the face of strong opposition from the U.S., keen to maintain the key role of the dollar in global world trade as effectively the hugely dominant reserve asset, with all the advantages that brings to the U.S. economy. Indeed Grant Williams, in his latest Things that make you go hmmm… newsletter (www.ttmygh.com ), drawing on material from Simon Hunt of Simon Hunt Strategic Services (who has perhaps been a more accurate commentator on what’s been happening in China than any other – See: Excessive negativity about China is not supported by fact ) picks out the following sentence from a report by Hunt: “America however will fight all the way to protect the US dollar’s status as the sole world reserve currency. Their Treasury Secretary stated recently that the US will do everything in its power to protect the US dollar as the reserve currency..”. One suspects that flood of reports downplaying the potential effects of the yuan’s SDR inclusion are in effect an attempt by the U.S. to downplay the potential significance and its possible effects on the U.S. economy. Perception is everything in economics and politics!
Hunt makes some other very pertinent points regarding China’s already strong progress in yuan internationalisation. One is that a number of oil producers are starting to price oil in China’s currency. Russia and Iran have both stated recently that they will accept Yuan in payment as have Angola, Venezuela and Sudan. Russia is the world’s largest oil producer. How long will it be before Saudi Arabia – as currently the largest exporter of oil to China, will follow suit? This will have a significant effect on oil trade in the petrodollar – perhaps the biggest single element in global world trade conducted in the U.S. dollar.
But there have been numerous other major initiatives from China which have been paving the way for yuan internationalisation. Not least the setting up of two rivals to the World Bank and the IMF in by creating the New Development Bank (BRICS), the Asian Infrastructure Development Bank and cementing ties with Russia and other BRICS and Shanghai Co-operation Organisation (SCO) members.
Co-operation with the other BRICS economies – the potential future engines of global growth – is also key towards yuan internationalisation. Immediately following the yuan’s acceptance into the SDR, notes Hunt, the BRICS New Development Bank (NDB) could start operations by borrowing in the Chinese currency according to the bank’s Vice President Vladimir Kazbekov. ‘’Considering the stability of the Chinese currency and the scale of the Chinese debt market, I think that one of the first steps in providing New Development Bank with funds may be entering the Chinese market to borrow in Yuan’’, he said last Tuesday at the opening of the BRICS media summit in Beijing.
He also confirmed that the bank will focus on loans in the national currencies of the bank’s potential customers thus obviating the need for borrowing countries to accumulate dollars for interest and capital repayments. Overtime that will reduce the market demand for dollars.
President Xi’s ‘One Road One Belt’ rejuvenation of the Silk Road ties is another aspect of China’s multi-faceted internationalisation plans, as is the setting up of a global payment system. As noted above, China is already moving fast and its ambitions are not necessarily to replace the dollar with the yuan as THE global reserve currency, but perhaps to put it on a parallel basis and on past performance it may well achieve this far faster than most Western economists would envisage.
Meanwhile China is still building its gold reserves – many believe it is doing this far faster than it is stating with its official reserve figures. It sees a place for holding a significant gold reserve in increasing yuan credibility in the future international economic system and has also suggested in the past that part of the SDR basket should be held in gold. A place at the SDR table will give it more of a voice in stating its case in the future.