Dollar and Yuan Increase SDR Basket Share

U.S. dollar increased more as a share of the basket than the yuan did. You wouldn't know that from reading the social media coverage though.

Reuters: IMF lifts weighting of dollar, Chinese yuan in SDR basket

The International Monetary Fund said on Saturday it has increased the weighting of the dollar and Chinese yuan in its review of the currencies that make up the valuation of its Special Drawing Rights (SDR), an international reserve asset.

The review is the first since the yuan, also known as the renminbi, joined the basket of currencies in 2016 in what was a milestone in Beijing's efforts to internationalise its currency.

The IMF raised the U.S. currency's weighting to 43.38% from 41.73% and the yuan to 12.28% from 10.92%. The euro's weighting declined to 29.31% from 30.93%, the yen's fell to 7.59% from 8.33% and the British pound fell to 7.44% from 8.09%.

The IMF said in a statement its executive board had determined the weighting based on trade and financial market developments from 2017 to 2021.

IMF Recommends Global Depression

The headline warns of the risk. But the IMF draws the wrong conclusion.

ZH: IMF Sounds The Alarm On Global Debt, Warns "United States Stands Out"

So what should policymakers - having gotten used to flooding the world in debt - do? Why the opposite, of course: as the FT summarizes, with the global economy growing strongly, the IMF recommended countries stop using lower taxes or higher public spending to stimulate growth and instead try to reduce the burden of public sector debts so that countries have more leeway to act in the next recession.

Translation: no tax cuts, no increases to deficit spending, i.e. another dig at everything that Trump is doing.

In fact, the IMF singled out the Trump administration’s tax cuts for criticism, since they left the US with a deficit of 5% of national income into the medium term and a persistently rising level of debt in GDP. It also explains why the IMF forecasts the US is the only nation whose debt load will rise in the next 5 years.

The next recession is already coming.

FT: IMF sounds alarm on excessive global borrowing

Half of the $164tn was accounted for by three countries: the US, Japan and China. The latter’s borrowing surged from $1.7tn in 2001 to $25.5tn in 2016, accounting for three-quarters of the increase in private sector debt in the past decade.

The fund was concerned that “an abrupt deleveraging process” in the private sector could trigger another financial crisis as borrowers tightened their belts simultaneously.

Zero Hedge reads between the lines and reaches the correct conclusion:

Here, the Keynesian would probably go nuts, and say that such a policy promotes saving, and is tantamount to austerity, which for some reason, is equivalent to economic death in a world where total debt/GDP is either 225% or 316% depending on whose methodology one uses.

Actually, come to think of it, it all makes sense when one considers that it is the very policies that define modern finance and economics, that have led the world to this precipice. In fact, reading the IMF report between the lines, it is nothign more than advance scapegoating for the inevitable global debt crisis that is coming, and which not even the IMF is hiding any more. What is most comical - if completely expected - is that the IMF is now blaming it all on Trump: not on generations of economists who steered the world to the point where there is more than $3 of debt for every $1 of GDP, and not on central bankers who flooded the world with debt so that the richest 0.01% can be richer than their wildest dream. Nope: it's all Trump's fault.

Somehow we doubt this advance damage control will work after the next, and likely final, crash.

The era of central bankers and economists "managing" the economy is coming to an end.

Brewing Battle Over Greek Debt Relief

FT: Is Greece just about to default?

Further, to Tsipras’ (and others’) surprise, Greece now runs a big primary surplus — over 3 percent of GDP in 2016, up from balance in 2015, and still running strong into 2017, even if some of it reflects temporary factors. Sure enough, that scorching fiscal withdrawal is accompanied by output declines, yet again. But in that context, Tsipras doesn’t need new finance for the budget as is if deposit flight is contained or if ELA is uncapped. Only if deposits flee and ELA is capped will Greece spiral. But thereby the Euro pandora’s box of ECB legitimacy will bust wide open. If Tsipras is ever going to stand and fight on debt reduction — i.e., default — now is the time.

Merkel, likewise, faced with this prospect, also has good reason to pick a fight on Greek debt reduction now.

Glad as she may be that Mme Le Pen has been dispatched, at least for now, Merkel’s immediate task, faced with “Saint Emmanuel”, is to reassure her voters that she’s not going to go soft, not for him, nor the Brits, nor the Italians, and so certainly not for Tsipras. Given the resurgent SPD since Schultz, her key concern ahead of Fall elections is risk of loss of votes to her right. So a flat-out fight with the IMF and Tsipras over debt reduction, with an insistence on the German version of ECB “orthodoxy” on ELA, all under the rubric of “European rules”, has big political attractions.

Even the most pro-EU members have domestic political concerns that cause them to behave in their national interest. Overall social mood is negative in Greece, tensions are rising in Europe.

The last time Greec issued bonds into the private debt markets (2014) it marked a peak for the Greek stock market, and would soon be followed by a political battle over austerity.

Zhou: Use More SDR; RMB Internationalization A Natural Process

The first part of this Chinese article linked below is a speech by Zhou Xiaochuan, here. The second part is some question and answer time with Zhou and Christine Lagarde.

Question 3

Lagarde: You just mentioned the SDR, to promote the inclusion of the RMB in the SDR regard, we have very good cooperation. I know that you and your team support broader use of SDR. Therefore, you also remove obstacles SDR users to enter the RMB market. Can you give us a brief idea of ​​promoting the use of SDR terms, such as SDR bonds?

Zhou Xiaochuan: We would like to see more widespread use of SDR, the People's Bank began to use SDR as the reporting currency of some statements. You mentioned that we are about to eliminate market barriers for the yuan into the SDR . On the one hand, the central bank tried to help improve the degree of freedom of the renminbi may be used in trade, investment and financial markets and other areas. On the other hand, we will be seen as a way to promote China comprehensively deepen reforms. This engine is the same role as an early reform of China's exchange rate regime of export-oriented economic development strategy played.

But we also see more widespread use of the RMB is a natural process, to respect the choice of market participants. If the dollar exchange rate stability, ample liquidity, no abnormal capital flows, when people prefer dollars. Otherwise, people would like to see diverse currencies to better manage risk, we are happy to see this gradual process of development.

Expanding the use of the yuan, the central bank has taken a number of policy measures, we can also do much more in terms of convertibility of the RMB, including further development of the foreign exchange market and reduce unnecessary regulatory measures. We are particularly concerned about the field of the yuan can not be freely used, ensure that the standards reached RMB freely available. We know that the use of the yuan in financial transactions is still not broad enough. Although the deal size is gradually rising, but it will not be a linear process, affected by the global market fluctuations, spiral. Of course, the yuan is expected to be able to long-term in the global financial market is more widely used. In addition, we also emphasize the importance of macroeconomic stability and low inflation. If we are to achieve a stable macroeconomic growth and low inflation, market participants will naturally choose to use more yuan.

EO: 周小川对话拉加德谈汇改：人民币更广泛的使用是一个自然而然的过程（附全文）

Shanghai Daily: China to continue promoting more flexible exchange rate: China's Central Bank Chief

MF last year approved the inclusion of the Chinese currency, RMB, into its Special Drawing Rights (SDR) basket as a fifth currency, along with the U.S. dollar, the euro, theJapanese yen and the British pound, marking a milestone in the RMB global march.

Zhou said that China is expecting the wider use of SDR, and is taking measures to promote freer use of RMB in trade, investment and financial markets, in an effort to reduce barriers for SDR users.

In regard to Chinese firms' high leverage ratio, Zhou said that China is working to improve the economy's resources allocation, and to ensure more resources flowing to the private sector, high-tech companies and the service sector.

PBoC Meets With Global VIPs, Bigger Yuan Depreciation Coming

Chinese financial media is abuzz following the PBoC's blitz announcement of meetings with key global policy makers on April 13.

The photo below is a screen grab from the PBoC website earlier today. Below is the full list of announced meetings.

易纲副行长会见美联储理事蕾尔·布兰纳德

April 13, 2016, People's Bank of China Deputy Governor Yi Gang attended the G20 finance ministers and central bank governors and the IMF's spring series of meetings during the regular session, met with Fed Governor Lael · Brainard in Washington. The two sides mainly on China-US economic and financial situation and exchanged views.

周小川行长会见美国财长雅各布·卢

During the April 13, 2016, People's Bank of China Governor Zhou Xiaochuan attended the G20 finance ministers and central bank governors and the IMF spring meeting in Washington Regular series met with US Treasury Secretary Jacob Lew. The two sides mainly on policy coordination under the framework of the G20 and China-US economic and financial situation and bilateral financial cooperation and exchanged views.

周小川行长会见美国贸易代表弗罗曼

During the April 13, 2016, People's Bank of China Governor Zhou Xiaochuan attended the G20 finance ministers and central bank governors and the IMF spring meeting in Washington Regular series met with US Trade Representative Michael Froman, on bilateral trade and financial cooperation and other issues and exchanged views

易纲副行长会见德国央行副行长布赫

During the April 13, 2016, People's Bank of China Deputy Governor Yi Gang to attend the Group of Twenty (G20) finance ministers and central bank governors meeting and IMF spring Regular series of meetings in Washington, he met with the German central bank vice governor Bucher. The two sides on key topics this year and next G20 exchanged views.

周小川行长会见世界银行行长金墉

April 13, 2016, People's Bank of China Governor Zhou Xiaochuan attended the G20 finance ministers and central bank governors and the IMF's spring series of meetings during the regular session, met with World Bank President Jim Yong Kim in Washington. The two sides on major issues of global economic and financial situation and China, China and the World Bank exchanged views.

周小川行长会见国际金融公司首席执行官勒奥鲁

April 13, 2016, People's Bank of China Governor Zhou Xiaochuan attended the G20 finance ministers and central bank governors and the IMF's spring series of meetings during the regular session of the meeting of the International Finance Corporation CEO Philippe Le Houérou in Washington. The two sides mainly on deepening financial cooperation, exchanged views on other issues.

周小川行长会见瑞士央行行长托马斯‧约尔丹

During the April 13, 2016, People's Bank of China Governor Zhou Xiaochuan attended the G20 finance ministers and central bank governors and the IMF spring Regular series of meetings in Washington met with SNB Chairman Thomas ‧ Jordan. The two sides mainly on issues in the Swiss financial cooperation and exchanged views.

周小川行长会见美国商品期货交易委员会主席蒂姆‧马萨德

During the April 13, 2016, People's Bank of China Governor Zhou Xiaochuan attended the G20 finance ministers and central bank governors and the IMF spring Regular series of meetings in Washington, met with the US Commodity Futures Trading Commission Tim ‧ Massad. The two sides mainly on issues of Sino-US financial infrastructure cooperation and exchanged views.

易纲副行长会见经合组织首席经济学家凯瑟琳•曼

During the April 13, 2016, People's Bank of China Deputy Governor Yi Gang attended the G20 finance ministers and central bank governors and the IMF spring meeting in Washington Regular series met with OECD (OECD) chief economist • Catherine Mann, both China and OECD on issues under the G20 framework for cooperation, and exchanged views on SME financing.

易纲副行长会见美国副财长内森·席茨

During the April 13, 2016, People's Bank of China Deputy Governor Yi Gang attended the G20 finance ministers and central bank governors and the IMF spring meeting in Washington Regular series met with US Deputy Treasury Secretary Nathan Sheets. The two sides mainly on China-US economic and financial situation and exchanged views.

周小川行长会见国际货币基金组织总裁拉加德

April 13, 2016, People's Bank of China Governor Zhou Xiaochuan attended the G20 finance ministers and central bank governors and the IMF's spring series of meetings during the regular session, met with IMF Managing Director Lagarde in Washington. The two sides mainly on IMF quota and governance reform, improve the global financial safety net, expand the use of SDR issues such as exchange of views. PBOC Deputy Governor Yi Gang, Lipton, IMF First Deputy Managing Director attended the meeting.

The article at iFeng comments: 周小川昨天会见了这7个大人物 人民币近期要有大动作(更新)

Wall Street Intelligence noted that there is no significant negative factors under the conditions of today's Bank of China slashed rare RMB against the US dollar exchange rate parity (depreciation compared with the previous trading day big 300 points). This seems to indicate the renminbi will soon have big moves.

The quiet period in financial markets is seen as an opportunity for yuan adjustment:

China's central bank is bound in the near future, we feel the current global trend of funds moving different, the recent re-promote the RMB exchange rate reform. Over the past six months, each time more foreign exchange reform will cause fluctuations in exchange rates; Because still have to rely on exports in the global emerging market currencies are devalued, the central bank announced a reform on the system of measures, which should more be seen as fierce devaluation excuse . But after the Fed rate hike cycle started, but then the situation has brought considerable foreign exchange reform the operating space.

With the dollar index is experiencing its longest ever upward trend, a number of Fed officials to begin marketing the Fed should raise interest rates in April idea (market everyone wrong understanding of Yellen's dovish stance) but China's central bank was on the Federal Reserve may raise interest rates in April, has warned.

China's central bank warned that if the Fed to raise interest rates in April, the Chinese central bank will raise interest rates the Fed's action to make the appropriate measures. In recent months, the RMB devaluation surprise to the market a huge shock. China's central bank in January 7th sharply down the RMB exchange rate, China to the United States in order to convey a clear message: China does not want the Fed to raise interest rates in order to bring a new round of China's capital flight situation.

We believe China's central bank will seize the global financial market is relatively quiet time, promote the realization of a more substantial two-way fluctuation of RMB against the US dollar.

The dollar's recent weakness, making the yuan against a basket of currencies to weaken did not cause the global market volatility. We expect the yuan to a basket of exchange rate will continue to slow to adjust, not only through the effective depreciation versus the dollar, but also versus the euro and the yen.

China May Pay A High Price For SDR Push

China faces a risk in entering the SDR because in order to enter the currency basket, it must open the capital account. Doing so changes monetary policy, forcing China to swap either independent monetary policy or stable exchange rates in the famous trilemma. Faced with an economic slowdown, China does not want to lose control over monetary policy. A depreciation in the yuan could ignite anti-China sentiment in the United States. Backtracking on opening the capital account would slam the door on the SDR and also be a step back in the reform push.

An article in the Economic Observer (人民币多空博弈正酣) looks at the growing battle in the currency market, with bulls and bears battling over the direction of the yuan. Although the central bank is likely to win in the long-run (their view), the short-term will be volatile.

One major factor is the push to have the yuan added to the SDR basket. China must allow greater capital flows, but this brings up the trilemma. A country can choose two of the three: fixed exchanged rates, capital mobility and independent monetary policy. China has chosen the first and third for decades, but if it wants to enter the SDR, it must abandon 1 or 3 for number 2. If China were to give up monetary policy, it might have to raise interest rates amid the economic slowdown to defend the value of the yuan. Given that China has massive foreign currency reserves, China might be able to buy its way out of the trilemma for a time by spending down reserves to maintain currency stability, such as during the 2016 presidential election in the United States. The point is, if there's a problem, China will have to pay a steeper price if it wants to stabilize the exchange rate while opening the capital account.

However, there's evidence that the PBOC has another weapon that it has already used to fight depreciation pressure: higher interest rates on deposits.

The EO says for the time being, it seems China is choosing to force up market rates to defend the exchange rate. This can be seen in latest interest rate cut where the PBOC raised the deposit ceiling. Following the latest policy change, banks can offer higher deposit rates than before. Banks did just that back in November when rates were cut and the deposit ceiling was raised. See Deposit Competition Begins: Some Chinese Banks Hike Long Term Deposit Rates

Once again, Chinese banks are hiking interest rates. Here's an article out today: 央行降息湖南多家银行存款利率上浮 最高1.3倍. The PBOC cuts rates and Hunan banks hike deposit rates, with the highest at 1.3 times the benchmark rate. (The prior ceiling was 1.3 times; the new ceiling is 1.5 times)

Last November 22, the central bank cut interest rates for the first time after a lapse of 28 months, and decided to expand the floating range of deposit rates from 1.1 times to 1.2 times. Subsequently, Changsha banks deposit rates quickly, "a float to the top," started a savings battle, after which the five lines also had calm himself, had all of a floating ceiling.

Also this year, on March 1 the central bank cut interest rates again, and the deposit rate floating range expanded from 1.2 times to 1.3 times. Interest rates on the first day, Changsha Bank, city commercial banks and other Huarong Xiangjiang River that is a high-profile announcement, the deposit rate will be "a floating to the top." Later, as the stock market more and more fire, banks Lanchu pressure increasing, Bank, Bank of China and a number of state-owned banks have begun to "stretch live", and then added to the "one floating to the top," the bank ranks.

Yesterday, the central bank cut interest rates three times shot, this time is the introduction of "medicine", announced the deposit rate floating range expanded from 1.3 times to 1.5 times the previous. This time, the bank will, as always, eager to "float to the top," it?

The chart below is from the article. The red numbers are interest rates that have increased. The banks are listed in the top row, with the central bank's benchmarks on the far left（央行）. The big 5 are to the right, followed by Postal Savings, then the big listed banks, then smaller banks. The first rate is the demand deposit rate. Below that is the 3-month, 6-month, 1-, 2-, 3-, and 5-year rates.

Wondering why bank stocks haven't rallied in the A-share market? Free market deposit rates may have already arrived as many banks cannot lift rates to the top of the new ceiling due to the cost. Furthermore, one analyst from China Merchants thinks the next rate cut will result in the elimination of the deposit ceiling entirely:

"Most of the bank's profits from deposit and loan spreads, the high current cost of capital, coupled with non-performing rate of bank loans has increased, resulting in deposit and lending margins narrowed further, the banks lack 'a floating top' power. "Changsha, a state-owned bank, a senior expert said.

Meanwhile, a senior analyst at China Merchants Bank Financial Markets Department Liu Dongliang analysis, taking into account the ratio of deposit interest rates go up 1.5 times, the interest rate market is entering "the last kilometer" sprint stage, is expected to announce at the next rate cut is likely to release the deposit interest rate ceiling.

China's reform effort is buying it time, lifting deposit rates at a crucial moment of monetary reform amid an economic slowdown, but if rates have peaked or are close to peaking because banks can no longer increase deposit rates, pressure on the exchange rate can commence as soon as conditions are ripe. The central bank could lose control of interest rates, or monetary policy could lose effectiveness if the push for internationalization of the RMB proceeds too quickly.

As a result, the EO wonders if now is really the best time for opening the capital account:

However, capital outflows, under domestic and international financial situation is becoming increasingly complex background, fully opening the door to capital may not be wise.

Chinese economists are worried about depreciation expectations setting in:

CASS World Economics and Political Research Office Director Zhang Bin says the RMB appreciation or depreciation depends on the intensity of capital account liberalization. If the current account surplus is larger than capital account deficit, it will support RMB appreciation. If the capital account is opened while the monetary authorities reduce efforts to maintain a stable exchange rate, coupled with the Chinese private sector's diversification of assets, it will create downward pressure on the yuan. "Recommend shifting policy from maintaining a stable RMB exchange rate to a relatively stable exchange rate. Want to ensure that the RMB exchange rate can be controlled. For a long time the market has been accustomed to the RMB rising against the US dollar, shifting to a trend of weakness versus the US dollar will leave the market unprepared, easy to breed fear, and one-way depreciation expectations are formed, resulting in difficulties in curbing a panic depreciation. Can choose to deepen the reform of the RMB exchange rate formation mechanism." Ding Zhijie said.

The EO concludes with this:

On the eve of ten years of currency reform, with $ 3.73 trillion in foreign exchange reserves (as of March 2015), the central bank desires to reverse exchange rate depreciation expectations and issue a "strong yuan" signal. Then, see how the market digests the signals.

The PBOC will be subject to market discipline. Fighting Mr. Market is expensive and as every central bank eventually learns, Mr. Market always wins in the end.

Related: China Adopts IMF Accounting Practice in Reserve-Currency Push

Yuan Fairly Valued

Senator Schumer isn't happy:

IMF to brighten view of China’s yuan

The International Monetary Fund is close to declaring China’s yuan fairly valued for the first time in more than a decade, a milestone in the country’s efforts to open its economy that would blunt U.S. criticism of Beijing’s currency policy.

...“It takes the rug out from under the feet of U.S. critics of Chinese currency policy,” said Eswar Prasad, a Cornell University economist and former China official at the IMF. “The U.S. relied to a significant extent on what was seen as the IMF’s objective assessment.”

The Obama administration disagrees with the IMF, maintaining a view that the yuan, also called renminbi, remains “significantly undervalued.”

The idea that the renminbi is undervalued is absurd, if anything it faces risk of significant depreciation in the event of a financial crisis.