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The PBoC’s call for a new global currency, the SDR, the US and the IMF

by Brad Setser
March 29, 2009

A $200 billion shared pool of reserves ($250 billion counting the IMF’s supplementary credit line) is tiny relative to the world’s $7000 billion in national reserves, or — more importantly — relative to the emerging world’s short-term external debt. The IMF currently lacks enough funds to be a lender of last resort for Eastern Europe, let alone the world. George Soros:

“capital is fleeing the periphery and it is difficult to rollover maturing loans. …. To stem the tide, the international financial institutions (IFIs) must be reinforced … the fact is that the IMF simply doesn’t have enough money to offer meaningful relief. It has about $200 billion in uncommitted funds at its disposal, and potential needs are much greater.”

A bigger IMF implies a somewhat larger role for the IMF’s unit of account: the Special Drawing Right (SDR), itself a basket of dollars, euros, pound and yen. When the IMF lends, its loans are denominated in SDR – not dollars, euros or yuan. China may argue that SDR-denominated lending is the first step toward creating a new “supranational” reserve currency. But that is a stretch. No one made such an argument back when the IMF was making a lot of SDR-denominated loans to Asia in the 1990s.

The IMF pools contributions from many countries, so denominating its accounts in a composite of the world’s main currencies make sense. Using the SDR inside the IMF isn’t a threat to the US dollar either. Last I checked, the dollar has somehow managed to maintain its position as the world’s leading reserve currency even though United States’ contribution to the IMF (its quota) is measured in SDR.

Indeed, the SDR – as the IMF explicitly recognizes on its website – isn’t actually a currency.

“The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members.”

Countries intervene in the foreign exchange market with dollars and euros not SDR. An IMF loan is just denominated in SDR – so the amount a country has to repay doesn’t change all that dramatically when the dollar moves v the euro. In practice countries actually want to borrow “freely usable currencies” not SDR. In other words, they generally want dollars and euros.

As Dan Drezner observed, many traders presumably hadn’t read Governor Zhou’s white paper or spent much time brushing up on the mechanics of the SDR . They consequently read a bit too much into the headline that was slapped onto Geithner’s comments at the Council. Macroman is right:

“Geithner said that …. he was certainly open to expanding the pool of IMF SDRs. This was an innocuous enough comment, as the IMF is likely set to see its funding levels increase dramatically.”

Deal Journal is wrong; Geithner never said he was only open to “abandoning the U.S. dollar as the primary global reserve currency.” He was open to increased “use of the IMF’s special drawing rights” but he also said this was “rather evolutionary, building on the current architectures, than — rather than — rather than moving us to global monetary union.”

Indeed, Zhou’s call for a one time SDR allocation (an SDR allocation is complicated ** but it effectively is a way for the advanced economies to help meet emerging economies need for hard currency reserves) is less radical than Martin Wolf’s call for an annual SDR allocation. Soros also wants an annual allocation as long as the crisis lasts. Wolf hopes an annual SDR allocation would allow emerging economies to build up reserves without running large current account surpluses.

A one time SDR allocation to increase the emerging world’s access to dollars and euros (the main current reserve currencies) is quite different than redenominating all of the world’s reserves into SDR. The world’s reserves couldn’t actually be redenominated in SDR unless the US and a host of eurozone countries started issuing a ton of SDR debt to replace all the dollar-denominated Treasuries and euro-denominated bunds, OATs and BTPs*** — now held as part of the world’s reserve portfolio. That isn’t about to happen.

I am still struggling to understand precisely what motivated Governor Zhou’s white paper.

One possibility is that he wanted to highlight the fact that the IMF doesn’t operate in dollars to help “sell”a bigger Chinese contribution to the IMF at home. Zhou can argue that China isn’t handing dollars over to a US dominated institution, as some might think. Or helping to bail out a bunch of countries in Eastern Europe peripheral to China’s national interest. By providing the IMF with SDR, China can argue that it is contributing in a small way to the creation of a new reserve currency.

The Journal’s Batson hints as such a motivation when he reports:

“China has resisted the U.S. push to make an immediate loan to the IMF because that wouldn’t give China a bigger vote. Ms. Hu said Monday that China, which encourages the IMF to explore other fund-raising options, would consider buying into a bond issue. The IMF has been working on a proposal to issue bonds, probably only to central banks”

Of course, Zhou’s call for a new global reserve currency was also intended to signal China’s concern about the direction of US policies. And just perhaps, to signal that China’s government is taking domestic criticism that it has squandered China’s savings to heart.

It some ways Zhou’s call is a sign of weakness as much as a sign of strength, as China’s leaders are now is clearly worried about the value of its reserve portfolio. Or perhaps they are just worried about being blamed for losses on China’s reserve portfolio.

Chinese policy makers are sophisticated enough to know that the US is not going to embrace a true supranational currency. Agreeing to a world where the IMF calculate its accounts in a basket of dollars, euros, pound and yen is one thing. Agreeing to a new currency that supersides the dollar is quite another.

Moreover, China’s call for a change in the global order is rather undermined by China’s ongoing desire to peg to the plain old dollar.

A discussion of reserve currencies ultimately is also a discussion about the exchange rate regimes that led a host of emerging economies to accumulate reserves. Zhou’s call puts some issues that China hadn’t wanted to discuss at the last leaders meeting on the table for international discussion.

Perhaps China’s leaders wanted to insulate their dollar peg from criticism, both at home and abroad, by arguing that they cannot change their peg without a broader change in the international monetary regime. China can argue that if the US doesn’t want to abandon the dollar, China shouldn’t be pushed to abandon its dollar peg.

The only problem is that there is no real link between the two issues. China could easily join those emerging economies that already allow their currencies to float against the dollar and the euro even in the absence of any agreement on a new global currency.

In a lot of ways, though, the most surprising proposal in Zhou’s paper wasn’t his call for a new global currency; it was his call for “international” management of national reserves. Zhou wrote:

Compared with separate management of reserves by individual countries, the centralized management of part of the global reserve by a trustworthy international institution with a reasonable return to encourage participation will be more effective in deterring speculation and stabilizing financial markets …. With its universal membership, its unique mandate of maintaining monetary and financial stability, and as an international “supervisor” on the macroeconomic policies of its member countries, the IMF, equipped with its expertise, is endowed with a natural advantage to act as the manager of its member countries’ reserves

That would really be a change. China currently isn’t willing to tell the IMF the currency composition of its reserves. And now it seems to be hinting that it might allow the IMF to manage a portion of its reserves!****

Chinese policy makers increasingly seem to view China’s large reserves as a burden, not as an opportunity.

Unfortunately, China is already stuck with this burden. In some sense, the current debate in China over the cost of maintaining a large reserve portfolio is a debate China should have had four or five years ago. Back then it was clear that China had put itself on a path that would lead it to accumulate huge reserves at a substantial cost to itself. It didn’t change though. As a result, it ended up providing a lot of dollar-denominated credit to the US over the last four years.

Now it is struggling to accept the consequences of the policy choices that left it with over 50% of its GDP in reserves or quasi-reserves.

That presumably is why previously unthinkable options – like global management of China’s reserves – seem to be getting serious consideration.

*”Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.”
** As I understand it, the IMF grants all countries SDRs. And then emerging economies can use their SDRs as collateral to borrow dollars and euros and the like from the central banks of the world’s advanced economies. It is a way countries that don’t have currencies of their own that the Fed is willing to accept as collateral in swaps can get hard currency reserves. If there is a better explanation, I am all ears.
*** German, French and Italian government bonds
**** Dr. Summers, in his academic days, made a similar proposal.

71 Comments

  • Posted by internationalist

    “I am still struggling to understand precisely what motivated Governor Zhou’s white paper.”

    My perception is Zhou has been influenced by a very prestigious European think tank.

    As we move away from a Uni-polar world, toward a multi-polar world and then one day hopefully a non-polar world a globalized system should not have a 1-nation global reserve.

    As Stiglitz recently mentioned, a new global reserve-SDR could be implemented within 12 months.

    Had this great nation, the United States simply lived within it’s means, used hot money flows wisely, and not overstretched itself in all 4 corners we would have a different story.

    Personally, I’m beginning to worry that on April 6, 2009 the markets may go south. This can be avoided, if:

    1. The U.S. agrees to the worlds call for a new global reserve

    And with that:

    2. Then Germany be more open to assisting tiny eastern european nations which by size and GDP are like Florda’s and Arizona’s by U.S. measures.

    Unfortunately, I’m beginning to doubt either will prevail and am therefore very cautious.
    The end of this meeting could be a sweet dream, or a global disaster.

    It’s really in the cards of the United States, and for it to realize that the current ecnomomic and monetary order since 1945 no longer justify today’s system incorporated with high growth emerging players.

    Thanks.

  • Posted by jonathan

    It’s fascinating to watch someone with so much knowledge of a topic work through issues. Thanks.

    I’ve been thinking China wants a bigger voice. They want their concerns addressed now and going forward, which has real implications for regulatory structure. While this has domestic appeal, I think they’re doing a nice job of stating their concerns without appearing bombastic. (Compare the French who for decades would preface every remark with a statement about their role as a counter-weight to the US, often made in a tone evoking wartime.)

    I can imagine China wanting management of a portion of reserves for stability and other reasons. I would think that implies a recognition their currency must appreciate over time.

  • Posted by Twofish

    I think what motivated the speech is that China wants to play a much larger role in international finance, but at the same time wants to keep domestic control over its own currency. Having an SDR-based system lets you do both.

    For example, suppose you have an Chinese treasury SDR-denominated bond. You could buy the bond in Shanghai with RMB, then trade it with someone in New York, who then gets payment in dollars, and you could do that without changing any currency restrictions.

    If you couldn’t do this with either dollar or RMB denominated bonds. Right now, you can’t sell Chinese treasury bonds in NYC, because no one in NYC has RMB, and you can’t have Shanghai trade instruments with NYC or London.

  • Posted by Christian

    Brad,

    Sometimes it really shows you work for the US-centric CFR. The dollar is the world reserve currency mostly because petrol is sold in dollars. That’s why all countries must have some USD, they all need to buy petrol and that is the place you need to look to find out if the USD will retain its dominant role. If the Chinese and the Europeans manage to convince the GCC to create its own currency pegged to a basket similar to the SDR, the USD would be sent to the woodshed and there would be nothing Washington could do about it.

  • Posted by Twofish

    bsetser: The world’s reserves couldn’t actually be redenominated in SDR unless the US and a host of eurozone countries started issuing a ton of SDR debt to replace all the dollar-denominated Treasuries and euro-denominated bunds, OATs and BTPs***

    That’s not true. Since the SDR is a basket of currencies, all you need to do to set up your currency reserves to match the SDR basket. What you can do is to have some institution (maybe the IMF) buy up Treasuries, euro-denominated bonds, and then issue SDR-denominated derivative securities based on the value of those bonds.

    There are also some very quick things that the Chinese government can do to push the proposal along. One quick one is to start issuing statistics in SDR’s instead of dollars. The second is to create a market for SDR denominated credit and currency forwards and options.

  • Posted by Twofish

    Christian: he dollar is the world reserve currency mostly because petrol is sold in dollars.

    ****NO IT’S NOT****. Oil is denominated in dollars, but you can sell it in just about anything. Most of Iran’s oil sales are bought and sold in Euros.

    The reason you want one currency to quote oil prices in is that if you have multiple currency then things just get incredibly messy, because you have several sets of numbers that have to match up.

  • Posted by bsetser

    Christian: Mexico and Canada both sell the US a lot of oil, and generally are paid in dollars. Both also have currencies that float against the dollar. Canada, like most of the G-7 (Japan excepted) has modest reserves — it isn’t supporting the dollar’s role as a reserve currency in the way that countries that maintain undervalued currencies and build up dollars are …

    And you also might find my views on the GCC’s peg interesting; I am not exactly a supporter: see my 2007 Peterson institute policy brief on currency regimes in the oil-exporting economies.

  • Posted by bsetser

    twofish — if China wanted to change the composition of its reserves to match the SDR basket, it could do so directly as well. of course, that would involve a meaningful diversification out of the dollar –which might have an impact on the market.

    that also holds is china buys SDR denominated bonds with dollars from a third party and the third party matches its SDR obligations with a portfolio that matches the SDR basket. the net flow there is dollar negative.

  • Posted by franko

    part of the reason why usd is the reserve currency currently is the fact of the usa military dominance…..which we all know is not permananent, but none of us knows when that may change

    i am looking for the shutdown of some carrier groups (easier politically than shutting bases inside the usa)

    interesting times indeed

  • Posted by lark

    China, it seems to me, wants to maintain 2 things: the value of their reserves, and the ability to maintain an undervalued exchange rate wrt the dollar, to protect and promote their exports.

    So why do they want to replace the dollar? It seems to me this course would undermine the dollar and make the peg more difficult to sustain.

  • Posted by Indian Investor

    Brad: If there is a better explanation, I am all ears.

    Me: If you go to the Directors and Voting Rights page on the IMF web site, you will see a list of Directors representing groups of countries, with each country having a certain number of votes out of a total. These same numbers are also understood as the “IMF Quota”. Currently the US has around 16+% share of the votes, while China has 3+% of that share. Broadly the distribution of the votes represents the distribution of GDP at the end of World War II. The US, UK, Germany, France and Japan are major shareholders in the IMF. A whole bunch of African countries together have around 3% stake.
    An SDR allocation works approximately in the same way as credit extended by the Fed to banking insitutions. Each Sovereign has an account with the IMF. When an SDR allocation is done, the total amount of SDR allocation is distributed amongst all the ‘member countries’ according to their ‘quota’ (or ‘voting rights’).The SDR is an accounting unit that is derived from the basket of currencies you mentioned. I’m quite sure USD,EUR and JPY are used but I’m not so sure that the GBP is also part of the SDR basket.
    So the member countries get an electronic credit which, as you rightly mention they can use the same way as forex reserves, excpet that the SDR transactions have to go through regulatory approvals from the IMF. Under the current arrangement, if a $500 billion equivalent SDR allocation is done, the US will get 16% of that credit, similarly the ‘traditional industrial countries’ (read WW II countries) get the lion’s share after the Eagle takes its peck. The poorer countries, and emerging markets get a much smaller credit, directly in proportion to their voting rights/quota.
    An SDR allocation has to be approved by an 85% majority vote, and with 16+% the US currently enjoys a veto power over IMF decisions.
    Typically, once an SDR allocation is through, the richer countries use their higher allocation to lend to the poorer countries. i.e. if the US gets $80 billion worth of SDRs, that amount can be used to lend out to the Eastern Europe economies, who will get a much smaller proportion of the SDR allocation due to their much lower quota.
    In effect the current SDR system is simply the same as the US dollar hegemony, shared partly with the few Western Europe/Japan countries above.

  • Posted by Cedric Regula

    I agree with Macroman’s call for more clarity in government officials’ statements. I just don’t think it’s possible.I was watching the TG & Bernanke congressional hearings last week on cnbc. They both were asked point blank if they supported the idea of a reserve currency other than the dollar. They both answered, without hesitation, with a simple NO!.

    However, when analyzing the comment, I think me, The Press, Wall Street and China will wonder if “NO!” really means something more like “Yes, we have no bananas” and the song goes on.

    But Zhoe deserves kudos in the silliness arena as well. What does he think the USG is going to do? Go back on the gold standard and hand over Ft. Knox to China? Does he really think the debtor class of the G20 will hand over their sovereignty (power to print money and issue debt) to the IMF so they can have their spending administered responsibly (pay creditors first?) He’s even funnier than Macroman.

  • Posted by Indian Investor

    Brad: And now it seems to be hinting that it might allow the IMF to manage a portion of its reserves!

    Me: I don’t see where Zhou is talking about this option at all. What you’ve quoted is item IV, so you have to consider the changes proposed in I through III before coming to this one. Also, what Zhou is talking about, in the correct context, is that the world’s reserve currency will the be the reformed SDR, and a common institution will invest globally with a stability mandate and reasonable returns, where countries can subscribe to SDR denominated securities from that fund. Zhou is clearly attempting to eliminate the problems caused by competitive FDI laws.
    I don’t actually see what the United States will lose from Zhou’s proposals, as long as they’re serious about wanting to be a commercial power rather than mainly a military power at least in the medium term. Based on a consensus amongst a broad range of economists, I believe that as long as the US dollar is the world’s major reserve currency, balanced trade cannot be achieved between the US and the rest of the world.

  • Posted by Cedric Regula

    2fish

    There are RMB on Wall Street. I just ventured back into my Franklin Templeton global bond fund and found that the currency denomination distribution of the fund is 10% RMB. No Chinese bonds are listed tho. So its either a currency holding, or there are some other countries’ bonds denominated in RMB sort of the way that’s done with dollars or yen. They do list “supranational debt” as 8% of the bond holdings, tho I don’t understand what that means exactly.

  • Posted by AV

    China appears to be rightfully more concerned about expanding the market for its goods and less about the immediate value of its USD reserves.

    One consequence of continued strong accumulation of the USD as a reserve during a global deflationary economic contraction is that it tends to result in the allocation of purchasing power to the US market, the market that currently needs it the least.

    If one considers the entire world market, it may be the case that there is no deflationary glut of manufacturing capacity, merely a gross misallocation of purchasing power. There are lots of people worldwide that would love to increase their standard of living. The current situation creates a massive difference in purchasing power that does not accurately reflect the amount of real productivity in various economic zones. Should the same work in the western EU or US really be valued so much more than it is in many Asian countries or in Latin America and elsewhere?

    It looks like China may have come to the conclusion that an expanded SDR, one that is inclusive of all G20 currencies and enhanced by a clearing function might allow for a much needed rebalancing of trade and also an expansion of purchasing power in markets other than the US, not to mention China’s internal market.

    This arrangement could only really work if the relative strength of each SDR currency is determined by a truly free currency market. In theory, a free market currency appraisal would reflect real world macroeconomic fundamentals. The expanded SDR could then more accurately reflect G20/world productivity than the USD alone, enhancing its appeal as a reserve and furthermore serving to allocate purchasing power equitably.

    The US should be careful not to outright reject China’s proposals. What China may in fact be saying is that the only way they’ll de-peg from the USD is within the SDR framework. The raising of funds for IMF lending programs through SDR bonds, which China said it would purchase, is also intriguing. These proposals may actually make lots of sense for all involved.

    Also, on a side note the Dollar Index (DX) already exists. The expanded SDR proposal is really only an addition of BRIC/Saudi/Argentina/Korea/Indonesia currencies to the mix and allowing for a clearing function.. Not really a big deal. Arguably, the DX has lost its relevancy as a hedging tool precisely because these currencies aren’t represented.

    The downside of an expanded SDR for the US is that since most commodities are traded in USD globally (hence the reason other countries hoard USD) the US would need to figure out its energy issues more quickly if commodities started to trade in SDRs. It would be a painful and likely quick transition period but necessary for the resumption of growth in the US and elsewhere.

  • Posted by Cedric Regula

    On US Energy Policy:

    Just heard on CNN that the new Obama 10 year plan projects the “Cap and Trade” solution to global warming will yield $650B in tax revenue and that revenue will pay for the $650B “jumpstart” towards reworking US healthcare.

    So we’ve pulled back the curtain around “Cap and Trade” and instead of a plan that reallocates profits from “bad energy” to “good energy” (as unlikely as that sounds), it is now an Air Tax that funds “healthcare reform”. Part of which is giving every doktor in the US $40K to buy “equipment” (that should read “PC” for normal people) so they can keep electronic medical records (that would be a database record for those of us who have been paying attention to technological achievements of the last 60 years).

    But this post is off topic, so ignore it.

  • Posted by Tono

    Sometimes people in very influential circles mention something simply to bring it into the collective consciousness, as a necessary first step before any action is taken. This prepares the masses to accept the necessity of it and allows the wonks to work out the best approach. The reality is that we are years away from having a realistic alternative to the USD as a reserve currency, but we have already begun to hear about it, Zhou and Geithner are just the biggest most public examples. It’s so early in the game that even Dr. Setser struggles to understand how it will work, as we all. Rather than speculate why someone did it, or point fingers, I would hope we just continue to put our heads together to come up with the fairest and most effective way to achieve this INEVITABLE move away from the unipolar USD world into a more global currency one.

  • Posted by bsetser

    Lark — good points. There is a contraction between China’s discomfort with large dollar reserves and its ongoing peg to the dollar.

  • Posted by Indian Investor

    Tono: It’s so early in the game that even Dr. Setser struggles to understand how it will work, as we all.

    Me: If you go to this link you get the quota numbers for many countries.
    http://www.imf.org/external/np/sec/memdir/eds.htm
    Assume that the Czech Republic and Hungary are in need of external financing from the IMF, and that this is to be done through SDR allocation worth $550 billion. The Czech Republic has 8443(0.38%) votes and Hungary has 10,634 (0.48%) votes out a total of 2,214,607 votes in the IMF. What this means is that the SDR allocation will add $ 2.10 b and $ 2.64 b to Czech and Hungarian resrves respectively.
    On the other hand the US has 16.77% of the votes and the UK has 4.86% of the votes, so the same SDR allocation will add $92.24 b and $26.73 b to the US and UK’s reserves respectively.
    Now the US and UK can conveniently make out an external financing loan to the Czech Republic and Hungary. They just got a proportionally bigger increase in their reserve position in return for their IMF votes. This can happen through the route of exchanging the US and UK’s SDR holdings with the Czech Republic and Hungary’s foreign currency (USD, EUR, etc) denominated Sovereign debt securities.
    It can happen any other way as well. Basically the US and the UK are just much bigger shareholders in the world, through their IMF votes. The SDR allocation brings in new forex reserves in total, of which the traditional industrial countries get a larger share, that improves their relative external financing position further, leading to more hegemony. Countries outside the WW II Club also benefit, but, as shown from the example they benefit much less and become more dependent on the HMS Ulysses Club.

  • Posted by Twofish

    franko: part of the reason why usd is the reserve currency currently is the fact of the usa military dominance…..which we all know is not permananent, but none of us knows when that may change.

    On the other hand, economic dominance as a reserve currency can outlast military dominance by several centuries. The Spanish dollar was the US legal tender until 1857, and you can argue that the NYSE used Spanish money as a unit of exchange until 2000 (??!!!!)

  • Posted by Twofish

    Cedric: There are RMB on Wall Street. I just ventured back into my Franklin Templeton global bond fund and found that the currency denomination distribution of the fund is 10% RMB.

    It’s likely that the fund has QFII holdings in which case the RMB and the bonds are still in a depository bank in Shanghai.

  • Posted by Twofish

    lark: China, it seems to me, wants to maintain 2 things: the value of their reserves, and the ability to maintain an undervalued exchange rate wrt the dollar, to protect and promote their exports. So why do they want to replace the dollar?

    Because it appears that the Chinese government has made a high level decision to sharply reduce it’s dependence on exports. Not that they have much choice in the matter.

  • Posted by Christian

    @ Twofish,

    Try to buy petrol from Saudi Arabia in Euros then come back to me. That is quite naive to think you can buy oil in other currencies. As of Iran, the only reason they sell it in Euro is because of the Embargo/tension between them and the US, surely you do understand that?

  • Posted by bsetser

    christian — it actually isn’t hard to trade euros for dollars and then to buy oil. and if you want to lock in a euro price for oil in the future, a european can buy both oil and the dollar forward.

  • Posted by Rien Huizer

    Brad,

    Apart from operational issues, if China would want to simply index its reserves to the SDR, it would gain only one benefit: the RMB/USD would become -in policy terms- a derivative of the USD , thus complicating US trade diplomacy (if that diplomacy really exists beyond the realm of rhetoric for domestic consumption). But it would be saddled with a disproportionally (re any plausible trade weighted index) large European component (EUR and GBP) and far too little JPY (though probably more than at present). The UK might like at least one foreign CB financing its trade deficit, but the Euro area might be less pleased with a half-trillion USD shift in “favour” of the EUR. Likewise Japan, that has a reputation of strongly discouraging foreign CBs to hold long term reserves in JPY. So this must be one of those lead balloons that have as their sole purpose to help in using up negotiating time neither side wants to spend purposefully.

  • Posted by Christian

    Brad,

    You are quite right but my point is ultimately the transaction is in dollar. When Japan buys petrol from Kuwait, it is in USD, when France buys from Nigeria, it is in dollar, when Australia buys from Saudi Arabia it is in dollar. These r called “petrodollars” for a reason. I would be curious to see how many r out there compare to China’s dollar reserves…

  • Posted by Cedric Regula

    Also, the Saudis and others in the Middle East have the same dilemma as China. They don’t want the dollar to drop because much of their investments are in dollar denominated assets. So most have resisted the idea of trading in anything else because they believe that would undermine the dollar.

    The Saudis in particular always say it would be meaningless to price oil in other currencies, when producers can just charge as many dollars as they want. I hope it wasn’t the USG that made them say that.

  • Posted by Cedric Regula

    Also, I saw Saudi dollars reserves quoted at $800B in a news article somewhere a couple years ago.

    That sounds high compared to what Brad attributes to them, but they may be a lot of the England and Cayman Island component of the TIC datea.

  • Posted by Namke von Federlein

    @bsetser – wow – it’s hard to keep up with so much excellent input from yourself and the gang. So, just a few comments.

    @Internationalist – quite a thing to say – where did your April 6 date come from?

    @Twofish – just a thought – if a company had proper collateral then they could issue (and register) their own SDRs – you don’t need a central authority for issuance?

    @bsetser – The managed peg of the GCC is possible because they are properly collaterized – speculators are free to play in a different sandbox?

    Iark – they don’t want to replace the dollar – they want a friction-free and properly collaterized currency hedge? So do I.

    Indian Investor – good point about SDR allocations, but one easily corrected with the stroke of a rational pen? If the SDR is a trading currency then the allocations themselves can be traded.

    AV – China has 20 million people entering the work force as young people each year. Foreign demand is nice but domestic demand is the obvious motor of the imperative.

    Cedric Regula – cap and trade is a scam (in my opinion) the US could reduce their energy use by 30% in a couple of years using existing technology – but hey – why not tax the poor foreign competition first, huh?

    The bottom line : thanks to everyone! I hope that my comments at least help to inspire a bit. Right or wrong – I feel privileged that freedom has created such a wonderful group of people.

    Thanks, Brad!

  • Posted by RebelEconomist

    Here’s a half-baked thought: I wonder if China can pay dollars into the IMF in return for a SDR denominated asset? If so, that would allow them to effectively change the currency composition of some their reserves and reduce their dollar exposure without any market-moving transactions. Moreover, if the IMF then made a loan denominated in SDRs but paid in dollars, no other country would sell dollars for euros, yen and pounds either.

  • Posted by AV

    “it actually isn’t hard to trade euros for dollars and then to buy oil. and if you want to lock in a euro price for oil in the future, a european can buy both oil and the dollar forward.”

    Yes, the transaction is simple – but purchasing USD forward to purchase oil or to hedge increases USD value

    Cheers

  • Posted by Namke von Federlein

    @Rebel Economist – exactly. Same for every country.

  • Posted by Indian Investor

    Brad: Geithner never said he was only open to “abandoning the U.S. dollar as the primary global reserve currency.” He was open to increased “use of the IMF’s special drawing rights” but he also said this was “rather evolutionary, building on the current architectures, than — rather than — rather than moving us to global monetary union.”

    Me: I watched the highlights video, then watched the full video of the Giethner talk at CFR, twice; just to be sure what the Geithner reaction actually is.
    Geithner began his response by stating he hadn’t read Zhou’s proposals. Obviously, this was a cover/qualifier statement. The interviewer ALSO said he hadn’t read Zhou’s essay, which was actually a give away, if you know what I mean … two very senior and highly regarded folks ostensibly discussing a paper they never read …
    Giethner said “We’re quite open to that”, referring to Zhou’s whole set of proposals. The condition was that it should be gradual and evolutionary.
    What he said next was revealing, and confirmed his view. He said that the way the dollar eveolves depends on what we do, first we need to come of this crisis (by getting credit flowing again, etc), and then achieve a more sustainable fiscal path, bringing the fiscal deficit down to a more sustainable level.
    Clearly Geithner has no issues with the USD being replaced by the SDR, with an appropriate weightage for USD in the SDR basket.
    Secondly, he recognizes what I referred to as “underlying financials” of the US Treasury as being important. His target seems to be to reduce the deficit in the medium term and demonstrate that the US Treasury isn’t in a debt trap situation. I think most of the plans and actions outlined by Geithner in the CFR talk were quite realistic and achievable.

  • Posted by internationalist

    Russia out with new call for new global reserve..suggests G20 players won’t support Zhou’s proposal and thus outlining plans for a Rouble, Yuan and Gold reserve.

    I like yuan and gold reserve myself, i’d probably sell dollars if that was an issuance…

    http://www.goldnewswire.net/russia-wants-rouble-yuan-gold-in-new-currency-basket

    Also there’s been some whispers about Iran forming alliance with China/Russia for energy & trade partnership…just a brief comment.

    Iran which is struggling with oil prices at current levels certainly needs some Chinese stimulus……..

  • Posted by internationalist

    Here’s the full link:

    http://www.reuters.com/article/marketsNews/idUSLS37648120090328

    I’m anxiously awaiting the verdict of next weeks G20. All the talk of switzerland, executive pay, etc is just the mainstream “blah”.

    the real behind the scenes battle is about the root of crisis- BrettonWoods1945 and agreeing on her replacement.

    Hope i’m wrong, but i feel tensions starting to steam…

  • Posted by Cedric Regula

    indian:”I think most of the plans and actions outlined by Geithner in the CFR talk were quite realistic and achievable.”

    You’re much more optimistic about “The Plan” than I am. Without going into the myriad of possibilities overwhelming my tiny brain at the moment, there are two problems I see with “The Plan”.

    1) It doesn’t work
    2) It does work

    As far as the “basket of currencies” goes, SDR or otherwise, back when Snow was treasury secretary in W’s first term he had been telling the Chinese they should do that.

    But as Brad likes to point out, it’s excessive reserve accumulation that is the problem, not what flavor it is. So the Chinese need to spend or invest it on something. And that something would need to result in the dollars coming home to the US where the Fed can do their duty and mop them up somehow. There will someday be too many of them worldwide whenever banks decide it’s no longer in vogue to deleverage.

    Or maybe we get global financial reform and we get rules upping capital reserves of banks and other financial entities. That would make a safe place for M3 to reside. TG did say he wants that to happen. Me too.

  • Posted by idoc

    if this claim about Geithner and AIG is true regarding closing out CDS portfolios at intentional losses to benefit banks just prior to asking for more taxpayer bailouts proves true, he needs to be imprisoned immediately.

    http://zerohedge.blogspot.com/2009/03/exclusive-aig-was-responsible-for-banks.html

  • Posted by DOR

    Mr Setser,
    Given the myriad of problems associated with basket-oriented currency arrangements, and the lack of any substitute for the US dollar, I’m puzzled as to why you would bring Rmb management into this discussion. The Rmb “floats” about as well as the Singapore dollar, and far better than the Malaysian ringget (easy target).

    Zhou Xiaochuan’s comments on a new international currency are a shot across the bow in the effort by China to win a greater say in the IMF. Nothing more. [Chinese central bank governors may read papers by European think tank scholars, but they don’t write public papers based on such without many levels of approval.]
    When China offers to put so many hundreds of billions of dollars at the IMF’s disposal, other less-well-endowed economies will have to reduce their share of the vote. As for changing the composition of China’s (Japan’s or any large player) reserves, the immediate impact would be exactly like changing the components of a stock market index: what’s out falls, and what’s in goes through the roof. Sorry, Europe / Japan, but if that happens you’re screwed.

    .

    As for traders reading beyond the sound bites, I’ll believe it when I see it. ADD. 30 second horizons. Long term is after lunch. Traders make great speed-dating candidates.

    .

    Undervalued exchange rates are soooo last August. When there isn’t any demand, it really doesn’t matter what you’re currency is worth.

  • Posted by bsetser

    DOR — china now operates something closer to a full on peg, not a basket peg. and it pegs to the dollar. graph the rmb v euro and v the usd over the last 12ms …

    the rmb’s management is very relevant as any chinese sales of dollars for other currencies would have the effect of driving the rmb down v those other currencies so long as the rmb is pegged to the dollar. plenty of coutnries supposedly have told china they don’t want china to shift its reserves in their direction for this reason.

    the peg is central to the current int. monetary regime, so i don’t see how one can be discussed without talking about the other.

    more importantly, i don’t quite see why china now wants more voice in the imf. its attitude traditioanlly has been “we are happy if the world gives us more say, b/c we deserve it, but we don’t think the imf matters enough to us to actually push for more votes/ etc.”

  • Posted by Glen M

    Brad,

    I think that Arvind Subramanian’s editorial you linked too, overstates the value of China’s GDP growth. By doing a a simple comparison of GDP stimulus vs. potential losses on reserves, he assumed that the growth in GDP was permanent. Without the very same mercantilist practices China’s GDP would shrink when its exporting advantages disappear. So China is even more wed its actions than stated.

  • Posted by curious

    Brad-

    The party is over and the hangover is just about to begin.

    The U.S.A. had the world of opportunity with all the hot money flows, we chose McMansions, Big SUV’s, and Cosmetic Surgery…….

    Let’s face it, we blew it. We just need to wake up and face the pain because we’re quickly moving into a new global competitive world where white collar skills which was traditional west are popping up in the developing east.

    Knowledge is power, and with access of the internet the East can now learn just quickly as the west.

    Truly a shame to see great nation such as the USA decline, but McMansions, Giant Suvs and Cosmetic Surgery….

    All 50 states can’t be HollyWood.

  • Posted by Twofish

    Christian: Try to buy petrol from Saudi Arabia in Euros then come back to me.

    It’s done all the time

    Christian: That is quite naive to think you can buy oil in other currencies.

    Yes you can. People that claim that you can’t just have absolutely no idea what they are talking about.

    Christian: As of Iran, the only reason they sell it in Euro is because of the Embargo/tension between them and the US, surely you do understand that?

    Sure, but when Iranians quote the price of oil they do it in dollars even though the oil is being paid for in euros. The Saudis and any other oil producer will do exactly the same thing if you want them to.

    The reason that people quote everything in dollars is because there is an oil spot market and a currency market which are separate, and if you start quote oil prices two currencies then people will make money off you.

    Suppose you quote your oil in euros, and everyone else quotes in dollars. Because currency markets move on a second by second basis, it is impossible that your euro quote will match exactly exactly the spot dollar price times the currency exchange rate.

    At which point some bright trader will buy and sell dollars/euro/spot euro oil and spot dollar oil and make a profit, which comes out of your pocket.

    So if you are oil producer, you want to quote one price, otherwise you’d get arbitraged. That’s why even the Iranians and Hugo Chavez will give you a price in dollars if you ask for a price of a barrel of oil. If you want to know the price in Euros, you then look up the USD-EUR exchange rate and figure it out for yourself.

  • Posted by Twofish

    Namke: @Twofish – just a thought – if a company had proper collateral then they could issue (and register) their own SDRs – you don’t need a central authority for issuance?

    You don’t. I can write you IOU’s in SDR’s and if you take them, everyone is happen. The problem is that if I write an IOU in SDR’s and my assets are dollars, really bad things happen to me (and maybe you) if the SDR/dollar rate jumps.

  • Posted by Twofish

    Also, if the PRC wants to diversify it’s reserves, now is the time to do it. Normally even an announcement that the PRC is going to diversify would cause the dollar to plummet, but right now any PRC announcements are insignificant compared to anything else that is going on.

    Have SDR denominated debt gives you exchange rate flexibility. If you are in an SDR agreement, you can buy euros and sell dollars over time, which is something that you can’t do if you have either euro bonds or dollar bonds.

    Also in a crisis you can pick and choose what currency you want to sell to satisify the SDR debts.

  • Posted by Cedric Regula

    curious:

    It ain’t over till the Fat Lady sings!

    We just embarked on an economic recovery program same as the one in 2001-2002, except on steroids. Since we are on steroids, I expect a replay of 2003-2009, except on fast forward and really, really BIG.

    Goes like this:

    Obama decides to liberate 5 Middle Eastern countries. We restart the draft, starting with Obama supporters that thought Iraq was a bad idea.

    The deficit hits 1.7 Trillion, with no end in sight.

    The building industry decides hell with McMansions, real Americans want Mansions! Congress ups the Fannie conforming loan limit to $3 million, Bernanke offers non-recourse TALF down payment loans, and drops that silly requirement of needing qualifying income.

    The Chinese invade N. Korea, take control of the printing press and start printing dollars to buy Treasuries.

    Chrysler uses Federal loans to make a commercial version of the M1 tank (called the Green Meanie). The NRA gets Congress to approve the canon as a non-automatic weapon. Crysler dealerships immediately sell out the next two years of production. Bernanke makes Let’s Not Tank loans available from TALF.

    The cosmetic surgery industry announces a new way to drop 150 lbs with no scars. Bernanke makes Belt Tightening loans available in the second trillion dollar tranche of TALF.

    The euro hit $4, then Europe goes bankrupt.

    Oil hits $800, then all oil producers go bankrupt.

    Then we’ll know it’s over.

  • Posted by Cedric Regula

    Forgot to mention that my mother will get drafted. Sorry mom.

  • Posted by Cedric Regula

    Forgot to mention the Mexican government falls the day after their oil hedges expire, and the remaining population of 100 million mexicans heads to the US and gets all the construction jobs building Mansions.

  • Posted by K T Cat

    Franko,

    I can see 2-3 carrier battlegroups going away pretty easily. That will put an end to the two simultaneous conflicts strategy and may also force the US into concentrating on a theater of action, leaving somewhere wide open with no force to fill the vacuum. Going one step farther, Iran will get the bomb soon. Bad medicine, that.

    I agree with the notion that the Chinese want to use the SDR to rotate out of the dollar. There’s no sign that the US has become serious about the production vs. consumption situation. In fact, we’re not serious about much of anything right now.

    How this is anything other than a drag on the dollar is beyond me. If Warren Buffet was the single largest investor in IBM and invested most of his money there, what would happen to IBM if one day he told everyone he was going to diversify into a basket of stocks including IBM, Cisco, Microsoft and Intel? How is this different?

  • Posted by DJC.

    Under the global US Dollar hegemony regime, China can’t just dump the dollar overnight, even if they wanted to because of the effect it would have on global trade. China doesn’t just export to the US, it exports to the rest of the world as well. So a collapse of because of China’s dumping of the dollar could cause collapse of trade elsewhere.

  • Posted by Indian Investor

    Brad: i don’t quite see why china now wants more voice in the imf

    Me: Specifically, Zhou’s paper talks about a) inclusion of the currencies of ‘all major economies’ in the SDR basket.
    b) SDR allocation isn’t to be calculation based anymore. China’s proposal is to have SDR allocations based on consideration of the existing levels of forex reserves, and weighted by GDP.

    If these two are accomodated a more equitable redistribution of global wealth will occur.

    The underlying Chinese stratgic shift is of course obvious. They’re going to massively shift away from export dependence to domestic expansion. Their domestic market will be much bigger than the export market once they stimulate actual consumption. But in turn this will increase their import levels. So they’re urging a re hash of the global monetary system to allow them to expand domestically without facing an external solvency crisis.

  • Posted by internationalist

    “If these two are accomodated a more equitable redistribution of global wealth will occur.”

    -Indian Investor

    you could also add:

    a more equitable framework for political and environmental cooperation will occur”.

  • Posted by YZ

    a wonderful blog. Many thanks.

    after reading all the comments, a few things seem to be clear: there will be an IMF loan;China will be the major contributor; Due to current weight of US, SDR composition needs to be adjusted to pacify Chinese dometic concern.

    a very interesting observation from Michael Pettis. Mr. Zhou’s comments didn’t appear in XinHua or People’s Daily. If that’s the case, USD will stay as the reserve currency for now.

  • Posted by DJC.

    Similar to more recent comments on the “global savings glut,” I can imagine such remarks really rankle our largest creditor, the Chinese. As we know, the Chinese were the major accumulator of U.S. financial assets during recent Bubble years. They are these days sitting on an unfathomable $2.0 TN of foreign currency reserves and are increasingly outspoken when it comes to their concerns for the safety of their dollar holdings. There is obvious reason for the Chinese to question the reasonableness of continuing to trade goods for ever greater quantities of U.S. financial claims.

    Interestingly, Chinese policymakers are today comfortable making pointed comments. Policymakers around the world are likely in agreement on a key point but only the Chinese are willing to state it publicly: the chiefly dollar-based global monetary “system” is dysfunctional and unsustainable. Mr. Greenspan may have actually convinced himself that dollar weakness has little relevance outside of inflation. And the inflationists may somehow believe that a massive inflation of government finance provides the solution to today’s “deflationary” backdrop. Yet to much of the rest of the world – especially our legions of creditors – this must appear too close to lunacy. How can the dollar remain a respected store of value? Expect increasingly vocal calls for global monetary reform.

    http://www.prudentbear.com/index.php/commentary/creditbubblebulletin?art_id=10209

  • Posted by HZ

    Too bad Zhou is focused on nominal returns. China really should consider real returns: make inflation indexed loans to potential future suppliers in their local currencies. Get the EMs out of dependencies on hard currencies and instead focus on productive capacities.

  • Posted by gillies

    “dump the dollar” is a very crude concept. whatever happens, this side of global war – this is a most unlikely policy move.

    in the cold war period of “mutually assured destruction” there was always a hotline so that at least war would not be declared and missiles launched on some simple misunderstanding.

    likwise in chinamerican finance, communication is necessary to avoid sudden moves and unanticipated reactions. that may be what they are doing.

    also, before an international meeting, parties may need to agree to leave each others’ dignity intact otherwise the chance of concessions is greatly reduced.

    i think the chinese are saying – “leave it open to us to tell our own people we are moving towards a new global reserve architecture – in the fullness of time.” i think geithner said “no problem”

    he then goes on television and reverses that statement. you have to read the double message – the one for home consumption and the one for the other side.

    i may not have this right – but the language of diplomacy is not literal, and literal interpretations can invariably be discounted.

    i think that the g20 meeting in london will end with an agreement to meet again. a lot of fire and smoke about tax havens will deflect blame from the participants.

    the great division in the world is between the savers and the splurgers. right at the moment obama, from a i g to afghanistan, is the king of the surgers and splurgers. other countries are afraid that the u s bonds will hoover up all the savings in the world, leaving them with failed issues. in which case mr obama will not be the new abraham lincoln, but the new president hoover.

  • Posted by internationalist

    my international sources in europe, asia and russia say the idea of a new global reserve is gaining massive traction by citizens and the politicians….

    If all leaders of G20 agree on this as a solution then the U.S. doesn’t really have much choice or does it???

    This weekend is full of suspense…Can we get a drum beat???

  • Posted by Bernardo A

    …sorry for the faulty previous post.
    Dear all, I may not catch in full the actual (political?) reason for Zhou’s speech, but it certainly reminds me of a blog entry that Brad posted some time ago (with the precious contributions of his loyal commentators, as usual).
    I think Twofish has catched the essence of the whole thing: “There are also some very quick things that the Chinese government can do to push the proposal along. One quick one is to start issuing statistics in SDR’s instead of dollars. The second is to create a market for SDR denominated credit and currency forwards and options.” The easiest answer to why Zhou made that speech is that China has become aware that this system is troublesome (in fact, a Chicken-game is a worrying situation) and wants to change it. G-20 is coming up, the now world understands that China’s voice is important, so: why not exploit the situation and just make suggestions? And Zhou is not suggesting idiocies, he is making Keynes’ points.
    After all, the Chinese have shown their determination to acquire power in the global context, and Zhou speech is just another hint to this.

  • Posted by Twofish

    KT Cut: If Warren Buffet was the single largest investor in IBM and invested most of his money there, what would happen to IBM if one day he told everyone he was going to diversify into a basket of stocks including IBM, Cisco, Microsoft and Intel? How is this different?

    First of all companies aren’t nations. Having said that, it’s not necessarily a bad thing. Too much money can be as bad for a company as too little, and usually a company telling investors that they are going to be getting a dividend is good for the company.

    For example, the fact that Western companies have been cashing in their investments in Chinese banks has been considered a good thing.

  • Posted by Howard Richman

    Brad,

    Zhou’s motives are obvious:

    1. He sees the U.S. committing economic suicide. He understands that the great recession is caused by global imbalances and that the United States is discouraging savings at a time when we should be encouraging them.

    2. He is looking for an exit plan from the dollar. He realizes that the dollar will probably collapse and he wants to get his reserves into a currency basket that will be guaranteed by the IMF.

    For more on my take, click here to read my commentary on Zhou’s statement.

  • Posted by locococo

    Behind that SDR derivative – at »the backers« offices – there was this two gents agreement on the end receiver of the bill to clear for the custody services performed in the most recent past. Only the ones in the name of the full faith. This plus the fast eroding independence of a bank consensus re-inflated through the much narrower limits set strictly for the next secretary to obey. Constitutional stuff…

  • Posted by locococo

    …for when the time comes.

  • Posted by DOR

    The Rmb went off its peg 45 months ago, and is up against the dollar 21.1% at end-March 2009. During that same time, the British pound is down 30.9% vis-à-vis the US dollar, the Australian dollar by 22.3% and the euro by 4.5%. The Swiss franc is up 4.6% and the Japanese Yen is 24.7% higher. Doesn’t look like much of a consensus to me.

    Restructuring the PBoC’s reserves such that, say, 30% is in euros and 20% in yen would drive those currencies through the roof. Maybe not directly, but once the word was out the effect would be the same.

    As for the IMF, this is a matter of grand strategy. China is on the ascendancy, and America is on the decline (the strategy goes). Steadily taking the reins of power from the Americans is just a matter of history, and control of the IMF is one of those reins. As for past statements, “we don’t think the IMF matters enough” . . . when WE don’t have much of a say.

    YZ’s point about the Zhou comments not appearing in Xinhua are hugely important. That alone pulls the rug from any immediate importance the statements might have had.
    .

    I wish I was as confident as Twofish that the PBoC can diversify out of the dollar now, without triggering yet another crisis we don’t need this year.

  • Posted by charles

    I think what PBOC wants is :
    Phase 1 : a block trade at current prices on its dollar reserves with the IMF as a counterparty. Dollar immediately tanks against all other currencies once this is accepted of course, but the loss is spread across all IMF members according to their weight in voting shares of the fund (a good incentive for Western countries to let go some of their votes in favor of BRIC nations !)
    Phase 2 : At this stage, it becomes easier to convince oil producing countries that they should peg their currencies to SDR instead of USD or at least manage their foreign reserves more or less in line with the SDR weights. Not all countries need to participate : GCCs pegwill be the last to go for obvious political reasons, but Iran,Iraq, Central Asian Countries, North African countries,Indonesia or even Russia could lead the way. As the new SDR would includes CNY, China would be able pay for the commodities it imports with Chinese Govt bills or bonds. And THAT is the big prize !

    What the Chinese may underestimate is how much they should allow their currency to reevaluate against all other currencies in order to have other countries accept this plan…

  • Posted by don

    I agree with much of what AV said in the first post. I would add that I think China is seeing that it will be hard to keep up the desired surplus with the current peg – the U.S. does not have sufficient loan demand and it would be hard to intermediate the Chinese capital inflows to spread dollar-denominated loans to other countries. It would be hard to depreciate the yuan further in the current environment. The new global reserve plan would expand the market for China’s loans and help them maintain their surplus without depreciation.

  • Posted by Indian Investor

    Brad: the rmb’s management is very relevant as any chinese sales of dollars for other currencies would have the effect of driving the rmb down v those other currencies so long as the rmb is pegged to the dollar. plenty of coutnries supposedly have told china they don’t want china to shift its reserves in their direction for this reason.

    Me: Suppose China decides to sell off, say $500 b of its Treasury Bonds and $ 200 b of its Agencies – and change them for a combination of Roubles, EUR & JPY. Meanwhile they continue to buy sufficient USD to keep the RMB/USD steady. The effect would be to strengthen Roubles, EUR and JPY against the USD. Meanwhile RMB/USD would remain the same, by policy.
    Also, I don’t know what the effect would be on RMB/EUR, RMB/JPY, etc. As far as I can see, there’s no effect.
    If you’re a foreign country paying for your imports in USD, the weaker the USD the better it is for your importers.Of course it’s the other way round for the US itself. As far as the Euro area is concerned – they benefit from weaker USD since their imports are dollar-denominated and most of them aren’t heavily dependent on exports to the US.

  • Posted by bsetser

    DoR — the RMB sure seems to have been repegged to the dollar last summer … look at the last 8 months rather than the last 45 …

    there have been three broad phases of rmb management since june 05:

    – the initial period of very modest appreciation, no matter what the $ did v other currencies
    – the period in late 07/ early 08 when the pace of rmb appreciation v the USD accelerated
    – the period from the summer on when rmb appreciation stopped/ the forward market started pricing in a rmb depreciation.

  • Posted by Twofish

    YZ and DOR incorrect. Zhou’s comments were very widely reported in Xinhua and the People’s Daily in the finance sections.

    They weren’t reported on the front page with trumpets blaring, but that is significant because it means that the Chinese government considers this an issue that should seriously be thought about and debated rather than an issue on which they have already made up their minds on.

  • Posted by Twofish

    What I think that China is planning on doing is that if China gives the IMF 100 to 200 billion in US dollars in exchange for SDR’s issued by the IMF, then if there some of the currency losses they get eaten by the IMF rather than by China.

  • Posted by Twofish

    charles: As the new SDR would includes CNY, China would be able pay for the commodities it imports with Chinese Govt bills or bonds. And THAT is the big prize !

    I really don’t think so. China can do the same thing with currency swaps.

  • Posted by Judy Yeo

    Brad

    could what Zhou be proposing be nearer to the the idea of a currency board, with the idea of making the global currency market more equitable? after all when the de facto currency is tied to a particular country, there are always problems with fairness, perceived or otherwise. as for the contrast with the asian financial crisis- well, the us dollar wasn’t exactly in the same gyration mode then was it?

    as for “China currently isn’t willing to tell the IMF the currency composition of its reserves. And now it seems to be hinting that it might allow the IMF to manage a portion of its reserves!****”

    There are at least 3 implications to that situation. By letting the IMF manage part of its reserves doesn’t mean the currency composition of its total reserves will be made known- remember the fable of the 3 blind men and the elephant? By handing over part of its reserves to the management of the IMF , it could well be handing over the thorniest problem in its economic stable; when the crap hits the fan , guess who’s gonna be the stable boy?!
    As for such a proposal being implemented, do you think China will go it alone? hardly likely, more possibly it will rope the USA in as well, can you imagine the country with the de facto currency being corralled into creating or handing over part of its reserves to an international body more international representation!

    Hmm… doesn’t sound that good now does it?

  • Posted by DOR

    Twofish,

    Thanks for the clarification on the Xinhua / Renmin Ribao reproduction of Zhao’s article.

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