The RMB 341.2 billion investment by the People's Bank of China (PBOC) in five-year International Monetary Fund (IMF) bonds has raised many questions on the reason behind such an investment. On the one hand, this has been seen as a strategic move to raise China's status in the IMF. On the other, this has also raised questions on whether the Chinese authorities are quietly promoting the use of the yuan abroad, especially in light of its currency swap deal with Argentina, and emergency lending agreements with the Bank of Korea, Bank Negara Malaysia and Bank Indonesia. These questions, especially the latter, are unfounded as what this investment really implies is a meagre diversification of its 2.1 trillion dollar reserves.
The agreement between the IMF and the PBOC suggests that SDR 15 billion out of SDR 32 billion has been invested under Series A notes, which allow for early payment on demand by the Chinese authorities under specific circumstances. The remaining investment are in Series B notes that do not have such a provision. Apart from the Chinese, Russia and Brazil have also expressed interest in investing into the IMF bonds.
What drove the Chinese to invest into the IMF bonds? In essence, concerns of excessive investment in dollar denominated assets has led to a small diversification in its portfolio. In 2008, the PBOC increased their holdings of US debt by 52%. Multiple reports suggest that the Chinese, seeking to reallocate resources, are moving out of the long-end of the curve. This investment is part of the many attempts to reduce the proportion of dollar denominated assets in its reserves.
The weights assigned to the US dollar, Euro, Japanese yen, and the Pound sterling in the SDR basket of four currencies are 44%, 34%, 11%, and 11% respectively. One of the main criterion to make it into the basket is whether the currency is freely usable in the global markets. Until this is the case, the current RMB 341.2 billion diversification becomes even more trivial. The use of SDR as a reserve currency is equivalent to holding reserves in the ratio of the four currencies currently in the basket. Even if the PBOC mimics the SDRs for all of its reserves, 44% of its reserves would still be in US dollar, 8% down from the previous year. The IMF, hence, is certainly not the decision-maker on what would be the global reserve currency nor can its unit of account, the SDR, replace the dollar as the reserve currency.
Internationalising the yuan would mean that the authorities must pave way for the yuan to be used by the market as a vehicle currency, quotation currency and as a currency in which investment into debt is possible. It would also mean that the yuan can be used as an intervention currency, anchor currency (for other economies) and as a reserve currency. These global functions of money, attributed to Peter Kenen, is possible only with full convertibility of the yuan. As a comparison, roughly 88% of daily trades in the currency market involves the US dollar. Further, the IMF data on currency composition of world reserves suggests that over 40% is held in US dollars in the first quarter of 2009. These are possible because of the liquidity in the US bond markets, complete convertibility of the dollar, and also to a significant extent, the low credit and default risk in investing into dollar denominated assets in the US. By doing what the PBOC has done, the Chinese have actually gone the otherway round and hence this move cannot be termed as a step towards internationalisation of its currency.
Being the first member country to invest in the first ever bond scheme from the IMF, China has only utilised the opportunity to diversify some of its reserves, which otherwise seemed difficult. The question of China gaining greater status within the IMF with $50 billion worth investment into the IMF, seems off track, yet again. Firstly, this investment is neither increasing its share capital in the IMF, nor increasing its voting share. Secondly, these investments need to be seen in the larger perspective of the G-20 commitment to support IMF's lending capacity. The European Union, for instance, has commited to contribute up to USD 175 billion out of which France has already contributed USD 15.8 billion and the United States has pledged support of USD 100 billion to the IMF. And lastly, this move by the PBOC cannot be placed within the ambit of political signals emanating from emerging economies for a greater role at international institutions for the lack of any significant agreement between the IMF and China to have received this sum of money.
Governor Zhang's call to oust the dollar from being the reserve currency earlier this year continues to be associated with the policy decisions at the PBOC and the Chinese government. At this juncture, the dollar seems the most obvious currency choice as an international currency, and with rapid global integration, ousting the dollar is only going to get more difficult nor is desirable. The roadmap for the renminbi or even the rupee to be an international currency is riddled with myriad obstacles, with convertibility of the currencies, and depth of bond markets being most complex issues of all.
The agreement between the IMF and the PBOC suggests that SDR 15 billion out of SDR 32 billion has been invested under Series A notes, which allow for early payment on demand by the Chinese authorities under specific circumstances. The remaining investment are in Series B notes that do not have such a provision. Apart from the Chinese, Russia and Brazil have also expressed interest in investing into the IMF bonds.
What drove the Chinese to invest into the IMF bonds? In essence, concerns of excessive investment in dollar denominated assets has led to a small diversification in its portfolio. In 2008, the PBOC increased their holdings of US debt by 52%. Multiple reports suggest that the Chinese, seeking to reallocate resources, are moving out of the long-end of the curve. This investment is part of the many attempts to reduce the proportion of dollar denominated assets in its reserves.
The weights assigned to the US dollar, Euro, Japanese yen, and the Pound sterling in the SDR basket of four currencies are 44%, 34%, 11%, and 11% respectively. One of the main criterion to make it into the basket is whether the currency is freely usable in the global markets. Until this is the case, the current RMB 341.2 billion diversification becomes even more trivial. The use of SDR as a reserve currency is equivalent to holding reserves in the ratio of the four currencies currently in the basket. Even if the PBOC mimics the SDRs for all of its reserves, 44% of its reserves would still be in US dollar, 8% down from the previous year. The IMF, hence, is certainly not the decision-maker on what would be the global reserve currency nor can its unit of account, the SDR, replace the dollar as the reserve currency.
Internationalising the yuan would mean that the authorities must pave way for the yuan to be used by the market as a vehicle currency, quotation currency and as a currency in which investment into debt is possible. It would also mean that the yuan can be used as an intervention currency, anchor currency (for other economies) and as a reserve currency. These global functions of money, attributed to Peter Kenen, is possible only with full convertibility of the yuan. As a comparison, roughly 88% of daily trades in the currency market involves the US dollar. Further, the IMF data on currency composition of world reserves suggests that over 40% is held in US dollars in the first quarter of 2009. These are possible because of the liquidity in the US bond markets, complete convertibility of the dollar, and also to a significant extent, the low credit and default risk in investing into dollar denominated assets in the US. By doing what the PBOC has done, the Chinese have actually gone the otherway round and hence this move cannot be termed as a step towards internationalisation of its currency.
Being the first member country to invest in the first ever bond scheme from the IMF, China has only utilised the opportunity to diversify some of its reserves, which otherwise seemed difficult. The question of China gaining greater status within the IMF with $50 billion worth investment into the IMF, seems off track, yet again. Firstly, this investment is neither increasing its share capital in the IMF, nor increasing its voting share. Secondly, these investments need to be seen in the larger perspective of the G-20 commitment to support IMF's lending capacity. The European Union, for instance, has commited to contribute up to USD 175 billion out of which France has already contributed USD 15.8 billion and the United States has pledged support of USD 100 billion to the IMF. And lastly, this move by the PBOC cannot be placed within the ambit of political signals emanating from emerging economies for a greater role at international institutions for the lack of any significant agreement between the IMF and China to have received this sum of money.
Governor Zhang's call to oust the dollar from being the reserve currency earlier this year continues to be associated with the policy decisions at the PBOC and the Chinese government. At this juncture, the dollar seems the most obvious currency choice as an international currency, and with rapid global integration, ousting the dollar is only going to get more difficult nor is desirable. The roadmap for the renminbi or even the rupee to be an international currency is riddled with myriad obstacles, with convertibility of the currencies, and depth of bond markets being most complex issues of all.
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