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Stuart Mackintosh is the Executive Director of the Group of 30, and last Friday, he was the first speaker at the GBD colloquium on Finance and China's Soft Power. He was speaking solely on his own behalf last week and not for the Group of 30, but still the organization is an interesting one. To quote from the Group's website:
"The Group of Thirty, established in 1978, is a private, nonprofit, international body composed of very senior representatives of the private and public sectors and academia. It aims to deepen understanding of international economic and financial issues, to explore the international repercussions of decisions taken in the public and private sectors, and to examine the choices available to market practitioners and policymakers."
Paul Volker is the Chairman Emeritus, and its membership includes many of the most respected names in global finance.
But to repeat, last Friday, Stuart Mackintosh was speaking for himself not for the Group of Thirty. And he was compelling.
As foreshadowed by the title, the goal for the event was to shed some light on two developments: the internationalization of China's currency, the RMB or yuan, and the establishing of the China-led Asian Infrastructure Investment Bank, AIIB. Albeit in different ways, the International Monetary Fund is integral to both or rather all four issues and Mr. Mackintosh talked about each of them:
o The Rise of the Redback or RMB,
o China's request to the IMF to include the RMB in the basket of currencies that make up the IMF's special drawing rights or SDRs,
o The establishment of the Asian Infrastructure and Investment Bank or AIIB, and
o The role Congress may have played in the creation of the AIIB. This is the widely held view that by not approving IMF reforms that would strengthen China's role in the IMF, Congress provided a catalyst for the creation of the AIIB.
RMB Internationalization. Today's quote relates to the second of these and to the question, will the IMF make the RMB part of the SDR basket? One criterion the IMF is required to consider is whether a prospective SDR currency - in this case the RMB - is "freely usable." On that point, Mr. Mackintosh, obviously, has some doubts.
Yet, taken by themselves, his opening observations about the process of making the RMB an international currency seemed to point in a different direction. He said:
"Let me start on the internationalization. Well, clearly that's a long-term policy goal. It's been under way for at least ten years now. It's moving the currency from a trading currency to an investment currency, and, perhaps, to a reserve currency. I say perhaps because that's a question mark that remains out there. We can't make a judgment on that yet.
"But it's [been] moving relatively fast for ten years.
So, for instance, approximately 25 percent of Chinese trade is now settled in RMB. And about 10,000 financial firms now do business in RMB. That's up from 900 in 2011. We have eight off-shore clearing locations outside of China now, dealing with the RMB. And there is almost a jostling to be part of that process. We have swap lines in place between the PBOC [People's Bank of China] and 25 central banks around the world. All of the major central banks are engaged very closely with the PBOC now. This is a remarkable change compared to ten years ago."
Having the IMF include the renminbi in the basket of currencies that make up IMF's Special Drawing Rights would give a highly public boost to the process of making China's currency a global one. Today, there are four currencies in that basket: the U.S. dollar, the Euro, the Japanese yen, and the Pound sterling. China has requested that the RMB be included as well, and the IMF will need to make a decision on that request later this year.
Meg Lundsager is a former U.S. Executive Director at the International Monetary Fund. Now at the Wilson Center, she too spoke at last week's GBD event. She explained that the SDR basket is reviewed every five years. The last review was in 2010, and for all practical purposes the current one is now underway, with a decision expected this November. That decision will be made by the 24 members of the IMF's Executive Board, and this is not one of those situations in which the U.S. has a veto. Ms. Lundsager also pointed out, however, that the Board could decide simply to postpone a decision on changes in the SDR basket for another year or so. In that case, the current weightings etc. would remain in place.
The Asian Infrastructure and Investment Bank. The Managing Director of the IMF, Christine Lagarde, has said that the question of including the RMB in the SDR basket is not a question of if but when. Similarly, it may have been inevitable that China would ultimately forge ahead with a new development bank along the lines of the AIIB. China proposed the bank in 2013, and the Articles of Agreement were signed by some 50 countries at a ceremony in Beijing on June 29. Mr. Mackintosh is hardly alone in believing that U.S. Congress, by its failure to approve a 2010 IMF reform package, had a lot to do with the establishment of this new, Chinese-led institution, or at least the timing of it. Here is some of what he said that score:
"Perhaps more important than the SDR question, which is a short-term question, and which will be determined later this year, is the long-term failure because of short-term decisions in the United States.
"In 2009 and 2010, in the heat of the financial crisis, everyone rushed together to solve it, to stimulate the global economy, to take action, to agree to a series of reforms [for which] ... a quid pro quo ... was greater representation in the IMF. [These were to be] voice and vote reforms, almost all of which have been now agreed by all the major allies. So the Chinese and the other emerging markets provided financing, essentially to help bail out the failures of the advanced economy. They didn't get what they were asking for. Why? Because the U.S. Congress for short-term political reasons are refusing to pass the necessary legislation so that those reforms can come into place.
"I want to suggest to you that that is a ridiculous short-term position, which has totally undermined the U.S. position in the IMF and China's commitment to the institution. ....
"And it has also led to a short-term victory [for China] with long-term implications. And what do I mean by that? I mean the Asian Infrastructure and Investment Bank. The Chinese have always wanted to put their eggs in different baskets, but they were waiting for the deal that they had signed for the IMF. The failure of that deal helped precipitate and boost the launch of the new Asian bank.
"It is amazing to see, or remember, the rush of American allies to join as founding members of this bank. ... Practically every single major ally of the United States, with the only exclusion being Japan, has exited the door to join the new institution.
"Now, I'm not saying that this bank, new bank, will supersede the IMF. It won't. But the Chinese launched an institution which in almost precipitously perfect timing had everyone rushing out to join - 33 founding members [in Asia], 17 outside the region, and that institution will have long-term implications for China's power, soft power, in Asia. It will bash up against the Asian Development Bank, hastening the decline of Japan's influence in the region. And it has implications for the IMF as well."
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