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.

China Forex Reserves Revalue Lower as Dollar Rises

It was another month of the rising dollar driving the value of China's forex reserves lower. China's forex reserves declined by $14.2 billion, but increased by SDR 22.8 billion. The dollar gained 1.3 percent versus the SDR in May. China's SDR reserves rose by 1 percent, the U.S. dollar reserves declined by 0.46 percent.

SDRs Are Coming

SDRs might extend the global credit cycle for another generation, at least that is the plan.

ZH: World Money: Five Hidden Signals From The IMF

World Bank Sells SDR Bond in Shanghai

Reuters: World Bk sells landmark SDR bonds at lower-end of guidance, challenges loom

The World Bank sold its first batch of Special Drawing Right (SDR) bonds in China at a yield well below those for similar Chinese bonds, highlighting Beijing's challenge in getting global recognition for its yuan currency and SDR assets.

The three-year bonds were sold at 0.49 percent, two sources with direct knowledge of the deal told IFR, a publication of Thomson Reuters, at the lower end of the World Bank guidance at 0.4-0.7 percent and below the three-year Chinese government bond yield at 2.434/2.387 percent.

A statement from the People's Bank of China said the 500 million SDRs ($700 million) issue, which was settled in yuan, was 2.47 times oversubscribed, and that interested buyers numbered around 50.

No Yuan Weakness Expected Ahead of Hangzhou G20

Assuming Yellen doesn't say something hawkish on Friday.

Caixin: G20杭州峰会有哪些值得期待的看点

The summit will reaffirm avoid competitive devaluation. In the previous G20 finance ministers and central bank governors meeting, policymakers repeatedly promised to avoid competitive devaluations, not for competitive purposes peg. We expect the leaders will reaffirm this commitment, and this will significantly reduce the likelihood of Japanese foreign exchange intervention, possibly even against the euro and sterling downside is a certain limit. Despite the Fed rate hike expectations, China will not be the first to let go devaluation. We believe that the probability of the RMB exchange rate before and after the summit, sharp correction is unlikely.

The summit will support the expansion of the use of SDR, which will boost the internationalization of the RMB. China will be included in discussions about the G20 agenda SDR, it began to publish data to the SDR-denominated foreign exchange reserves, and was recently approved by the World Bank issued the first batch of SDR bonds in China's interbank bond market. These efforts will be recognized by the leaders, and is considered part of the international monetary system reform. RMB added SDR basket will come into effect in October. Development of SDR market has important strategic significance for the internationalization of the RMB.

World Bank Issues SDR Bond in China

Which country will be the center for SDR financing?

Xinhua: World Bank to issue SDR bonds in China

China's central bank said Friday that it had allowed a division of the World Bank to issue bonds denominated in special drawing rights (SDR) in the country's interbank bond market.

The International Bank for Reconstruction and Development was approved to issue bonds worth 2 billion SDR (2.79 billion U.S. dollars), according to the People's Bank of China website. Chinese yuan will be the currency of settlement.

The first batch will be put on the market "soon." Interbank debt denominated in SDRs will diversify investment portfolios both in China and abroad.

The inclusion of yuan in the SDR will take effect in October.

Industrial and Commercial Bank of China (ICBC), the country's largest bank by market value, will be the lead underwriter for the issue.

These will be the first bonds denominated in the SDR since 1981.

More on China's Coming SDR Bond

SCMP: August lift-off: China set for Special Drawing Rights bond issues, report says

China might take another big step forward this month in its long-term aim to forge an IMF money system into the world’s dominant currency.

Mainland media group Caixin reported that the World Bank planned to issue bonds denominated in Special Drawing Rights in China as early as the end of this month. It said policy bank China Development Bank was also planning an SDR bond issue.

Preparing for the End of the Dollar Era: China Plans SDR Bond Issuance

The dollar won't cease to be a reserve currency, but the path to the SDR or multi-currency future is being forged by competitors such as China. The political need will drive this development: countries need an asset than cannot be rendered worthless by a hostile U.S. government.

The evening of July 23, during the G20 finance ministers and central bank governors People's Bank of China International Secretary Zhu Jun held in Chengdu, told Caixin reporters, is preparing for an international development agency's first SDR-denominated bond issue, the relevant details are still Finally, under negotiation. "SDR-denominated bonds can provide a wide range of investment products, reducing the exchange rate and interest rate risks, the official beginning of the investors particularly appealing. As the market continues to advance construction will attract more private sector involvement, thereby gradually SDR bonds development of the market up. "

Zhu Jun also introduced a long time, the use of enhanced SDR faced with a problem that developed countries hold more SDR but reluctant to use, but more needs to hold more willing to use the emerging markets and developing countries rarely SDR current G20 parties also studying how to make SDR better play its role as a supplementary reserve asset.

SDRs also raise the possibility of a global central bank, likely the IMF, unrestrained by any government. If you think central banks are doing a great job, the IMF as central bank will do an even greater job.

Finally, although this is often reported as a negative for the U.S. dollar, the greenback cannot serve as the world's reserve currency for much longer, for reasons of math. The dollar could barely handle the rise of China and it would be unable to handle a similar rise by India. One way or another, the dollar is set to decline along with the U.S. economy in terms of relative size. Both can continue to grow, but they will become a smaller part of the global economy. This process was accelerated by the use of financial weapons and economic sanctions in recent years, and will likely accelerate further should Trump win and reorient American policy towards the national interest.

Caixin: 独家∣首只SDR计价债券有望8月底发行

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.

Zhou Xiaochuan’s Long March

Submitted by Jennifer Johnsrud, CAIA, Portfolio Manager at TEAM Wealth Investments

Zhou Xiaochuan’s Long March

Rarely does a central banker change the course of history. However, it is possible that Zhou Xiachuan, head of the People’s Bank of China (PBOC), just might. Janet Yellen, Chair of the United States (US) Federal Reserve, pay attention: history is being made without you. The most important leadership lesson learned from Zhou Xiaochuan is that a strategic leader with a deliberate, well-executed and institutionally supported plan can achieve transformational change within a bureaucratic, heavily filtered environment. In Zhou’s case this transformational change is the internationalization of the Chinese currency, the renminbi (RMB). He publicly laid out his plan in a 2009 essay titled “Reform the International Monetary System”. Zhou clearly defines the problem he is trying to solve: the global financial insecurity which is linked to the US dollar (USD) serving as the world’s reserve currency. Zhou’s strategic plan encompasses improving China’s the macro-prudential policies, renminbi inclusion into the IMF’s Special Drawing Rights (SDR) currency basket, and eventual opening of China’s capital account. Following these steps, Zhou sets the stage for the culmination of his plan: replacement of the United States Dollar (USD) as the world’s reserve currency with the Special Drawing Rights.

Steps to globalization

The first step for Zhou and the People’s Bank of China towards gaining global credibility was to improve China’s macro-prudential policies. Macro-prudential refers to the use of regulations to reduce the financial systems inherent risks. Examples of these macro-prudential policies include setting capital reserve requirements for banks, establishing limits on the amounts of leverage used by institutions and individuals and forming sound interest rate policy. Zhou began implementing these policies in the early 2000s. To further strengthen China’s ongoing commitment to improving macro-prudential policy, Zhou has maneuvered to incorporate the goal of opening the capital account into the proposal of the 13th Five Year Plan, China’s traditional planning tool. Opening of the capital account is viewed as the last remaining step to internationalizing the RMB.

Triffin’s Paradox

A leader’s effectiveness is most often measured by what is achieved. Zhou is an example of a leader avoiding a problem by preemptively solving it, creating a solution so the problem doesn’t appear in the first place. In this case, Zhou’s solution dissolves Triffin’s Paradox. The core of Triffin’s Paradox is that the issuer of a reserve currency must serve two entirely different masters: their domestic economy and the international economy. Currently the US dollar is the world’s primary reserve currency. A reserve currency is a currency that is held in significant amounts by governments, banks, and institutions as part of their foreign exchange reserves. A reserve currency is also the standard currency of international transactions. For example, commodities such as oil are priced and transacted in US dollars (USD). This flow of USD puts in place a floor value for the dollar, creates natural demand for dollars that other currencies do not have. So what the US Federal Reserve does matters greatly to the Chinese. If US interest rates are increased, the USD strengthens and the RMB weakens. This is the crux of Triffin’s Paradox: if US Federal Reserve Chair Janet Yellen needs to raise interest rates to normalize the US economy she destabilizes China’s (and other countries) currency. Using the SDR, which is a basket of currencies, (USD, Euro, Yen, Pound Sterling with RMB integrated in October 2016) is an elegant solution. Because the reserve currency is not dependent on any one country, the paradox is completely avoided.

Success in Stakeholder Management

One of Zhou’s strongest leadership traits is his ability to serve two masters: global markets and the Communist Party leadership. An example of how well Zhou maneuvers is exhibited by the devaluation of the RMB in August of 2015. Internally, Zhou proposed a RMB devaluation as a matter of national interest. China’s domestic economic growth was stagnating and devaluation was necessary to jumpstart growth. To the global markets, Zhou portrayed the devaluation as a step towards a freely-tradable currency, an improvement from the current state where the currency is currently pegged to the USD and does not trade freely. (Anderlini, 2015) Devaluation, while highly disruptive to global stock markets, proved to the IMF that China was serious about a freely traded RMB. Zhou achieved a major milestone with the RMB’s inclusion in the SDR in November of 2015. This was not only an acknowledgement of China’s growing global economic importance, but was also a catalyst to drive further reform in the domestic financial sector.

The wheels are in motion for an interim step aimed at the broader use of the SDR as a world currency. Currently, a Chinese led program with the IMF for an SDR capital market initiative allowing domestic Chinese investors to participate in domestic bond issues denominated in SDRs is expected to launch in July 2016. (Marsh, 2016) This means that Chinese companies will issue bonds in SDRs, not just RMB. In October 2016, the RMB will have a weighting in the SDR of 10.9%, USD 41.7%, Euro 30.9%, yen 8.3% and the pound sterling 8.1%. (Marsh, 2016) Not only is this a positive for Chinese investors it also helps to stem the exodus of capital outflows from China.

An SDR Accord

In contrast to Zhou’s meticulous and methodical plan for the future of the Chinese RMB, the world’s other central bankers, Janet Yellen of the US, Mario Draghi of the European Union and Haruhiko Kuroda of Japan, (the Big Three) are floundering. Unorthodox measures such as negative interest rates are the latest tool to try and correct the direction of these stagnating economies. None of these measures, especially in Japan, seem to be working. None of the Big Three have presented or much less published their plans for the future. They may hold press conferences and focus on transparency but there is no strategic plan.

It is time for the world’s central bankers to embrace the PBOC’s plan and work together to create a far reaching inclusive currency accord similar in scale to that of the Plaza Accord Agreement of 1985. In the Plaza Accord, the US, Japan, West Germany, France and Great Britain came together and agreed to depreciate the USD by 50% over a two year period. This depreciation was needed in order to restore the global trade balance and stimulate global economic growth. Because of this accord, the world experienced unprecedented growth for the last thirty years. However, the potency of the Plaza Accord has dulled over time.

The US dollar is exhausted from serving as the world’s reserve currency. It has been quantatively eased, survived a zero interest rate environment (ZIRP) and of late has been rocketing up in value. The time is now for the US dollar to pass the torch of its reserve currency status to the Special Drawing Rights administered by the International Monetary Fund. For the sake of global financial security, which includes the security of the US, US Federal Reserve chair Janet Yellen must embrace PBOC chair Zhou’s solution to the Triffin Paradox. Proactive engagement by US Federal Reserve Chair Janet Yellen is imperative if the US is to maintain its influence over world financial market policy.

De-Dollarization or More Clarity: Why Is PBoC Reporting Reserves in SDR?

An article in the Economic Observe airs several viewpoints on the PBoC's decision to begin reporting foreign exchange reserves in SDR.

EO: 三月外储增了还是减了？

Xie Yaxuan think, not only can the dollar-denominated, from dependence on a single currency. Exchange rate from the IMF website in March USD / SDR = 0. 709814, February 0.723948. The yuan central parity peg to the dollar from a single reference to "a basket of currencies", weaken the impact of the US dollar against the RMB exchange rate and foreign exchange reserves.

The logic is that, SDR-denominated more objective look at changes in central bank foreign exchange reserves. March foreign exchange reserves in US dollars is +103 billion US dollars, if the SDR-denominated value of -378 one hundred million SDR. Diversified currency structure of foreign exchange reserves, the central bank official reserves contain the factors of exchange rate changes, denominated in a different unit pricing, the results are not the same. If the only result of dollar-denominated term, China may come to the net cross-border capital flows conclusions. "The central bank is expected in March -1000 billion yuan foreign exchange, but the situation continued to improve cross-border capital outflow is not over."

In Chen Shiyuan opinion, with the RMB will soon join SDR, SDR international representation and stability will be strengthened in the future will play a more important international reserve and financial system, can move in the international monetary developments. The central bank to promote SDR, in fact, is a win-win --SDR importance of strengthening, containing RMB will benefit, will help promote the internationalization of the RMB and enter the national reserves. Specifically, the central bank with the SDR-denominated foreign exchange reserves, can play a demonstration effect, in accordance with the composition of SDR allocation of foreign exchange reserves, can be more stable, to avoid the single currency exchange rate risk. "This rumor behavior and issuing SDR bonds and earlier before the RMB effective exchange rate of the SDR basket, are consistent." "This may well be a bold attempt." Senior analyst of China Merchants Bank Asset Management, said Liu Dongliang. He believes that this is China "to promote de-dollarization of the center", while strengthening SDR influence and status of initiatives, in theory, can indirectly promote the internationalization of the RMB.

In fact, SDR rather limited direct impact on cash flow, because whether it is in actual transactions or on the reference configuration as an international investment issues, SDR are not have its uses. IMF SDR allocation is the essence of unconditional and no-cost credit to its members, SDR is essentially a credit assets.

According to Xie Yaxuan words, in practice, the actual trading SDR generated is not much, only SDR book assets, means that the yuan join the SDR does not allow countries to force RMB reserves increase, adding SDR is not able to bring direct economic benefit. RMB is actually added SDR as an international reserve currency pave the way for international recognition, the RMB to build confidence and credibility; more realistic sense, it is hoped that such confidence allows countries renminbi as a reserve asset holdings, thereby China to increase the financial allocation of assets for domestic bring incremental funding. In particular, the introduction of funds to domestic interbank bond market. Balance the foreign exchange market can not rely strictly limit capital outflows, but to use effluent flows into a balanced manner. "In the longer term, China aims to promote the internationalization of the RMB, the reform of the existing international monetary system."

Almost, the Xie Yaxuan believe in SDR terms, in line with the central bank to further liberalize the domestic inter-bank bond market to foreign investors in the general direction. The central bank governor Zhou Xiaochuan has said it is actively studying the issue SDR-denominated bonds in China. By counter-cyclical macro-prudential policy and strictly control the impact of cross-border capital outflows, the RMB internationalization process has slowed down, but it is still a long-term goal of the central bank.

...Contrast variation value of dollar-denominated foreign reserves and SDR-denominated, Chen Shiyuan found that if the appreciation of the euro, the dollar-denominated rises; but the appreciation of the euro, SDR will depreciate against the dollar, so the SDR valuation will offset some of the impact. "If the future of the unexpected strength of the dollar, dollar-denominated foreign reserve subject to exchange rate fluctuations and decline, but at sdr-denominated foreign exchange reserves, but would be more stable in this regard, the reference to the SDR can better stabilize market confidence." Said Chen Shiyuan .

SDR Inclusion Was A Honeypot: US Asks IMF to Aggressively Police Members

FT: US calls for more aggressive IMF policing

US Treasury Secretary Jack Lew has called for the International Monetary Fund to play a more aggressive role in policing exchange rate fluctuations, global imbalances and its members’ failures to live up to commitments to boost ailing global demand.

...Mr Lew’s comments signal continuing US anxiety over the nature of some currency movements around the world and the management of current account surpluses by other big economies such as China and Germany.

The Yuan Needs to Drop

Bloomberg: China Should End Exchange-Rate Distortion, Ex-PBOC Adviser Says

"I don’t know why the PBOC is so obsessed with the stability of the renminbi exchange rate," said Yu, who was an adviser to the monetary authority from 2004 to 2006 and is now a member of the Chinese Academy of Social Sciences. “A flexible exchange rate will give greater impetus to China’s economic readjustment and growth paradigm shift."

...The significance of the SDR inclusion may have been exaggerated, Yu said.

"The inclusion is symbolic, though it should be regarded as a good thing," he said. "It will not have any significant impact on anything and it will change nothing unless the inclusion is a step toward more reforms of the international monetary system."

China's renminbi has to fall for the same reason a ball thrown in the air needs to fall. If the U.S. dollar falls, the yuan can maintain a semi-peg with the greenback, but if the dollar is about to break out, the yuan must depreciate versus the dollar. The SDR push is a political achievement and for China's internal politics it will be a significant achievement that may push forward reforms, but by itself, it is not a meaningful change for the currency.

China Paints the Tape on FX Reserves Ahead of SDR Inclusion

China's SDR Drama

Chinese are very nervous about the IMF vote. There were many reports that the IMF postponed its November 4 meeting, but the IMF had previously stated the meeting would be in November, with no specific date. Where Chinese media got the November 4 data is a mystery to me. One such article is at iFeng: IMF“爽约”人民币决议 个中有何玄机, it theorizes what this "delay" means, but quotes economists who say the yuan is likely to be added to the SDR basket.

Another article asks, what will happen if the yuan enters the SDR? It speculates the yuan will be 14% to 16% of the basket based on trade and reserves:

According to IMF the relevant provisions of the currency itself is a combination of the weight of the exporting country where the issuer and other currencies as the foreign exchange reserves held by the amount derived, are expressed in units of SDRs. According to the latest data, the relative share of exports and reserves were 60% ​​and 40%.

Based on these two indicators, China's exports (including exports of goods and services) in 2014 was $ 2.341 trillion, compared with Japan ($ 736 billion) and the UK ($ 835 billion) more than twice, only slightly lower than the United States level ($ 2.352 trillion) (uncertain whether the eurozone export data should not be included within the euro zone exports). Instead, the foreign exchange reserves denominated exposure data in 2014 was only $ 76 billion, far less than $ ($ 3.839 trillion), euro ($ 1.347 trillion), pounds ($ 231 billion) and Japanese yen (237 billion US dollars ).

If the yuan included in the new SDR currency basket, its weight will be much higher than the right of the pound and the yen's weight, but still far below the US dollar and the euro. IMF August report recommends yuan in new SDR currency basket weights will be 14% -16%. Our results calculated basically the same.

RMB included in the SDR SDR interest rate will also affect the SDR interest rate is based on interest rates in March SDR currency bonds is adjusted weekly. Since October 2014, the SDR interest rate to 0.05 percent the lowest. Dollar, euro, pound, yen last three months Treasury bill rate of 0.04% - 0.36%, 0.48% and 0.00%, the lowest interest rates and therefore constitutes a practical lower limit binding. 3-month Treasury bill rate was 2.286% renminbi, if included, would make the SDR interest rate increases by about 22 basis points.

iFeng: 人民币若加入SDR会发生什么

Also getting a lot of headlines is a phone interview with UBS chief China economist Wang Tao, who had the following to say about the yuan:

The exchange rate is concerned, since the exchange rate reform this year, began to have some of the devaluation, there are some important sense the appreciation of RMB exchange rate reform is mainly to increase his flexibility, the degree of two-way floating, gradually decoupling with the dollar, I think this is very necessary, we can also see that the US economic recovery is now relatively stable, the Fed will start raising interest rates, the dollar has seen a sharp appreciation against all major currencies and emerging market currencies. With the US dollar means that the yuan relatively basket of currencies there is a clear appreciation that this trend will continue, the renminbi is now overvalued now, the domestic economy is also facing downward pressure. Our interest rate policy would also go down, and this time really should be decoupled with dollars.

The interview touches on the new 5-year plan, GDP growth, and debt among other topics. iFeng: 瑞银汪涛：人民币纳入SDR后应与美元脱钩

Another take, but same conclusion:

"The big risk for global markets over the next several months is a worsening in China’s economy -- characterized by nonperforming loan issues -- which could lead China to de-peg from the U.S. dollar, lower rates and, in the process, force the liquidation of risk assets around the world," Burbank wrote. The world may be heading into "a global downturn that leaves no region safe, including the United States."

Bloomberg: Burbank's Passport Says No Place Safe in China-Led Decline

To SDR or Not to SDR

Peterson Institute for International Economics: The Chinese Renminbi Is Not a Freely Usable Currency Yet

In summary, in my view, the RMB is not a freely usable currency by the standards of the market or by the narrower standards applied by the IMF in the past for including a currency in the SDR basket. IMF members in November may reach another judgment. Any perception, however, that the IMF is bending its standards for political reasons will do a disservice to the SDR as an international reserve asset and to the integrity of the IMF.

Find out why at the link.

Payback for Hacking?

Reuters: IMF review recommends delaying currency basket adoption of yuan

The International Monetary Fund should put off any move to add the yuan to its Special Drawing Rights currency basket until September 2016, an IMF staff report said, a move that would effectively end the Chinese currency's chances of an early inclusion.

...The report said the implementation of any formal decision to add the yuan to a basket of currencies comprising dollars, euros, pounds and yen should be delayed so as not to disrupt financial market trading on the first day of 2016.

Another year of deflation for China if it can manage it. Then another year at least, unless China wants to give the next president a great opening to pass protectionist trade measures.

PBOC Prepares New SDR Push

China Rallies Around Yuan as IMF Mulls Reserve-Currency Inclusion

In a new report issued late last week, the People's Bank of China detailed moves it will take to help gain reserve-currency status for the yuan, also known as the renminbi, or people's currency. They include opening the door wider for foreign central banks and other institutional investors to invest in China's bond market.

The central bank also will give foreign entities greater freedom to sell yuan-denominated debt in China, and for Chinese companies to issue such bonds overseas. Further, it will ease limits on Chinese individuals and companies investing in foreign assets. The report didn't specify a timetable.

...In recent months, China has accelerated the overhaul by putting in place a long-awaited deposit insurance system and moving closer to free up interest rates, a critical element in revamping its financial sector. In addition, it has allowed greater access for foreign investors to buy Chinese securities, and vice versa. It is also putting final touches on a plan to make it easier for Chinese residents and companies to directly purchase stocks, bonds and real estate in foreign markets.

"China is not far from realizing its goal of capital-account liberalization," the PBOC said in its report, referring to free cross-border flows of funds for financial transactions.

PBOC Propping Up Yuan Ahead of SDR Inclusion

The monetary reforms taking place in China are good, necessary and inevitable in the long run, but the immediate impact of an open capital account is in dispute, with many (myself included) expecting depreciation as a result if current forces remain in effect. One reason China may be rushing for SDR inclusion is it cannot keep the yuan propped up forever given the trend in the internal economy, private investment, monetary policy, overseas interest rates and the U.S. dollar.

Earlier this week I posted China May Pay A High Price For SDR Push, which centered on an Economic Observer article covering the risks of the SDR push, including the risk of currency depreciation. More evidence supporting this view is out:

WSJ: China Pushes Yuan Against the Tide
iFeng 翻译: 中国逆势力挺人民币

As pressure mounts on China’s currency to fall, Beijing is stepping up efforts to keep it strong.

On Thursday, the central bank set the yuan at its highest level against the U.S. dollar in more than a year, defying a raft of poor economic reports this week, signs of mounting capital outflows and the launch of a broad stimulus package aimed at juicing up the economy.

The forced upward path of China’s currency is challenging policy and financial-market norms. In other countries, monetary easing as aggressive as the stimulus package would typically send a currency tumbling, as it did in Japan, Europe and the U.S. But China is in the midst of a push to get its currency more widely traded abroad and to gain reserve-currency status with the International Monetary Fund, goals that could grow harder to reach if the yuan were to significantly weaken or show instability.

Beijing’s economic priorities are also changing. China is seeking to shift toward a consumption-based economy that isn’t so reliant on cheap exports and investments. This would give it more room to keep the yuan, also known as the renminbi, strong and stable.

Don't forget money printing in years prior either. China does not have a market exchange rate and the debate over the yuan being under- or over-valued is an academic one when there isn't a free market. Though even without a free market, the The Informational Power of the Offshore Yuan Exchange Rate can still pull the yuan lower as it did in 2011 and 2012.

A CASS researcher sees market forces pushing the yuan lower again. The headline asks: After full convertibility, will the yuan appreciate or depreciate?
iFeng: 人民币可自由兑换后是升值还是贬值？

CASS financial researcher Yi Xianrong writes: However, the internationalization of the RMB, the Chinese government should be faced with difficult choices. That is, if you want to keep the yuan's strong and powerful, the yuan will not be fully liberalized, the yuan freely convertible schedule becomes quite uncertain, since after the opening the Chinese government will not be able to hold the initiative on the yuan.

...And to be included in SDR, its criteria for access the renminbi freely convertible. If the yuan freely convertible, the Chinese government will be incapable of keeping the yuan strong or preventing devaluation.

CICC's latest report predicts that China will soon launch a series of measures to improve the yuan "freely usable" level, and by the end of the year the renminbi will be called a fully convertible currency.

From the CICC Report:

In conclusion

We expect that China will soon launch a series of major policy measures to enhance the yuan's "freely usable" level, The yuan to join SDR. Although the "free to use" Without a clear definition, but it is SDR basket of goods
The main criteria credits (currently SDR currencies including the dollar, euro, sterling and yen). SDR assessment of this year's big Shall be held in October, we believe the planned financial liberalization measures, such as the Qualified Domestic individual investors (QDII2) Plans and expand market access to qualified foreign institutional investors, will soon be implemented. We expect the renminbi Before the end of this year will be referred to as fully convertible.

At the same time, China's financial markets, especially the bond market will be rapid development, which will also Chinese state sector assets, restructuring of the balance sheet to support. Earlier this year, the Ministry of Finance increased the amount of government bonds issued, and launched a Local government debt swap plan Ge 7. Financial deepening is to provide adequate tools for domestic and foreign investors to invest an inevitable step.
These developments will boost the yuan as a reserve currency. If the yuan successfully joined the SDR basket of currencies will be international Social passed one yuan as "hard currency" favorable signals.

Internationalization of the RMB will not be a simple linear Process, and may go through the accumulation and development for a longer period may be possible to reach a dominant currency in the current Competing critical point. RMB internationalization could still have a long way to go, but in any case, the rise of the renminbi are It will be a significant event noteworthy, for China, Asia and even the whole world will have a profound impact.

Also from the CICC report are some charts showing why China can make a strong case for inclusion of RMB in the SDR basket:

English coverage of the report: China's CICC: Yuan may be fully convertible this year.

Back to the Yi Xianrong article (bold in original):

Therefore, investors must be aware that even if the yuan included in SDR, does not necessarily make the yuan appreciation, the renminbi is not necessarily a strong currency.

Now the most critical question is, under the current circumstances, further reform and opening of China's financial markets, all kinds of capital controls lifted, or full liberalization of capital and the free convertibility of the yuan, the appreciation or depreciation of the RMB is?

Because the current domestic and international market situation, one depends on what time the United States to raise interest rates; the second is to look at the trend of China's monetary policy.

Start with the situation in the US, the current US employment data support the Fed's exit QE policy, allowing interest rates to return to normal.

Thus, despite the Fed's rate hikes are cautious attitude and pace, but in September this year to raise interest rates, but the probability is very high. If the Fed rate hike this year, the yuan to maintain the current strength is not easy.

If US interest rates and the dollar strong, there may be disadvantaged or devaluation of the renminbi (against the dollar) start. Especially in the case of the more the possibility of the yuan freely convertible.

We look at China in the global dollar market waiting for the occasion to raise interest rates, China's central bank cut interest rates RRR has been very frequent. Cut interest rates three times in six months time.

And the central bank launched a comprehensive easing of monetary policy, interest rates drop after registration, real economic data has not significantly improved, for example, downward pressure on economic growth did not slow down, CPI for 8 months at "1" level, PPI lasted nearly 40 months of negative growth.

Import data released last week continued to deteriorate for many months, which shows the lack of domestic demand. If the government to reverse this economic situation, we will further launch a series of policies of excessive credit expansion, such as RRR cut interest rates, market liquidity will certainly increase, coupled with the recent analysis of a large number of institutions of international hot money out of China, devaluation The probability will rise.

Therefore, if the yuan at the end of free convertibility of the RMB appreciation not exist but the risk of devaluation. In this regard, the investor is to pay attention

Another article asks "Why Hasn't China Joined The Currency War? 为何中国没有加入全球“货币战”大军？ The answer is the SDR.

And this may be a first. Grouped in with these articles, and a top headline in iFeng's finance section, is the translation of ZeroHedge's article on the local debt plan: China Goes "Unconventional" In Effort To Tackle Trillions In Debt, Rescue Economy

iFeng 翻译: 外媒详解：中国正创新货币工具 比QE更先进

PBOC Claims Nations Secretly Holding RMB Reserves

China’s Zhou Says Some Countries Using Yuan in Reserves

Some countries are already using the Chinese yuan in their foreign-currency reserves without announcing it publicly, central bank governor Zhou Xiaochuan said.

While China’s yuan has begun to be used as a reserve currency for several years, some countries “may not be willing to say so,” Zhou told Bloomberg on the sidelines of the International Monetary Fund meetings in Washington.

...The inclusion of yuan in the currency basket of Special Drawing Rights, or SDR, the IMF’s unit of account, will happen when conditions are right, PBOC deputy governor Yi Gang said yesterday in Washington. “A canal is formed when water comes,” Yi said, using a Chinese idiom. The basket currently is made up of the dollar, euro, pound and yen.