David Marsh: China Aims to Make IMF's Special Drawing Right a Real Currency

2016-05-06 IMI

The Official Monetary and Financial Institutions Forum (OMFIF) is a global financial think tank headquartered in London. David Marsh: Managing Director, Official Monetary and Financial Institutions Forum (OMFIF). LONDON (MarketWatch) — China appears likely to speed up promotion of the International Monetary Fund’s special drawing right under a plan to establish a platform this summer for SDR borrowing by Chinese and foreign entities on China’s onshore capital market. The initiative will help fulfil several strategic Beijing monetary and economic objectives. These include boosting international acceptance of the yuan , which enters the IMF’s composite currency unit in October with a weighting of around 10.9%, joining the dollar, euro, yen and sterling as officially recognized reserve currencies. Beijing’s SDR capital market initiative will allow domestic Chinese investors to subscribe to domestic bond issues with a significant foreign currency component, a means of helping dampen capital outflows that have gained prominence in the last 18 months as a result of progressive capital liberalization. The SDR borrowing platform seems likely to be set up as early as July, earlier than expected, in advance of the Chinese currency’s formal SDR adherence. This will necessitate creating a synthetic SDR that can be related, through forward pricing, to the “new” SDR being created on Oct. 1. This step could lead the IMF to update its procedures for fixing the SDR, which at present is set daily, but in future may need to be established on a 24-hours-a-day basis. China is open to extending further the number of currencies in the SDR basket. It would favor, for example, the rupee joining in coming years in line with India’s desire to internationalize its currency, but China stresses this should take place only if driven by capital market requirements. The Chinese SDR initiative, depending on the market response, could eventually allow the SDR to become a currency in its own right, rather than an artificial, narrowly used aggregation of leading currencies. But this is a long journey that faces many hurdles and may never be completed. Foreign sovereign issuance of yuan bonds is at a very preliminary stage. The U.K. government raised 3 billion yuan in an offshore bond in October 2014. South Korea issued a 3 billion yuan domestic Chinese “panda” bond in December 2015, a pioneering action that could pave the way for further such transactions in both SDRs and yuan. If Chinese resident investors become keen purchasers of SDR-denominated bonds, as well as domestic yuan bonds by foreign borrowers, this would contribute to improving the health of China’s international balance sheet. Chinese officials have long backed shifting China’s net foreign assets (the difference between external claims and liabilities of China’s combined public and private sectors) towards foreign holdings by non-public sector investors. Furthermore, officials would welcome denominating some of these claims in yuan rather than in foreign currencies led by the dollar. Bringing the Chinese currency into the SDR, in a long-term move trailed by Chinese officials to produce a new “super-sovereign reserve currency,” was accomplished last November, after a short, decisive Beijing campaign to win acceptance. The decision marks the latest stage in a long Chinese effort to lower the dollar’s international monetary dominance.Yet the U.S. Treasury joined the other international representatives on the IMF executive board in unanimously approving the yuan’s inclusion. The U.S. believes that, by obliging Beijing to open up its capital markets and other parts of the economy as a quid pro quo for the yuan upgrading, the West has won a worthwhile prize in accelerating China’s international economic integration. Zhou Xiaochuan, governor of the People’s Bank of China, has been the public face of Beijing’s SDR campaign. He said at in Paris at the end of March that China intended issuing domestically orientated SDR-denominated bonds to promote the composite currency’s use. Up to now, however, the start date has been uncertain. A nascent market in SDR bonds started in the early 1980s, but never took off, because of the wide gulf between the official use of the SDR as a reserve currency unit for central bank and the virtually non-existent private market for the SDR in market transactions. As a result of latest Chinese action, the gap could narrow in future years.

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David Marsh: China Aims to Make IMF's Special Drawing Right a Real Currency

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