Brad Setser

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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.


  • 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.

  • 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


    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


    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


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