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As noted in an earlier entry, the Global Business Dialogue hosted a discussion last month on FINANCE AND CHINA'S SOFT POWER: A Look at the Future of the RMB and Other Items in China's Tool Box. Meg Lundsager was one of the panelists. Now a Public Policy Fellow at the Wilson Center, Ms. Lundsager represented the United States at the International Monetary Fund, IMF, from 2000 to 2014, and for the last seven of those years she was the U.S. Executive Director.
While she touched on other issues, the larger portion Ms. Lundsager's remarks dealt with the IMF's pending decision on whether to include China's currency, the yuan or renminbi, in the basket of currencies that define the value of the IMF's Special Drawing Rights or SDRs. As a page on the Fund's website explains, "The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries official reserves."
Actually, SDRs serve a number of functions. Mr. Lundsager explained, for example, that "The SDR rate is the [IMF] lending rates, the charges that the IMF levies when countries borrow." As it relates to the RMB, however, there is something less tangible but perhaps more important about it. Including the RMB in the basket of currencies that define the SDR would be an enormous boost to China's drive to make the RMB an international currency. They have already met with considerable success. The RMB is now the world's fifth most widely traded currency after the U.S. dollar, the euro, the British pound, and the Japanese yen--the four currencies that make up the SDR basket today. We assume it was with an eye to furthering the process of internationalization of the RMB that "the Chinese ... publicly requested that the renminbi be included in the SDR."
In her presentation on July 24, Ms. Lundsager made a few observations on the likelihood of that happening. She didn't say it would happen, but, as today's featured quote suggests, her comments pointed in that direction. After all, as Ms. Lundsager noted, the Managing Director of the IMF, Christine Lagarde, said a while ago that the RMB's inclusion in the SDR basket was not a question of if but when.
And indeed, our impressions is that Ms. Lagarde recently reinforced that view. During a July 29, on-line interview she did with the IMF's Gerry Rice. s correspondent from Xinhua asked whether the recent turmoil in the Chinese stock market would affect the IMF's decision about SDRs and the RMB. "If we look at the Chinese [stock] market, particularly the Shanghai market," Ms. Lagarde said, "we are still up - they are still up 80 percent relative to a year ago." She noted that the IMF had just concluded its regular review of the Chinese economy, the so-called Article IV review, and that the IMF believes the Chinese economy is "resilient." On the specific question of including the RMB in the SDR basket, Ms. Lagarde said she did not believe the recent stock market developments in China would impact the IMF's assessment of the Special Drawing Rights basket.
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But decisions aren't made until they are made. The great strength of Ms. Lundsager's presentation at GBD was how clearly she laid out the elements of the process and the criteria the IMF will need to consider. Here are some of the points she covered:
Every Five Years. The IMF reviews the SDR basket every five years. This is a review year.
Currencies and Weights. Essentially, the issues are what currencies should be included and what weights should be given to each of them. Originally, SDRs were defined in terms of gold, but that changed in 1973, after the U.S. went off the gold standard.
2000 Shift from Countries to Currencies. 2000 was a watershed year for SDRs in two respects. Up until that time, the IMF had, in fact, looked to countries more than to currencies. After the introduction of the euro in 1999, however, it no longer made sense to focus on countries when considering the SDR basket. From 2000 on, therefore, the focus has been on currencies. As noted, the four currencies which now define the SDR are the U.S. dollar, the euro, the British pound, and the Japanese yen. 2000 and "Freely Useable." Another major development in 2000 was the IMF's decision to include the concept "freely useable" in assessing a currency's fitness for inclusion in the SDR basket. A "freely useable" currency, Ms. Lundsager said, "is basically a currency that is widely used. It is widely used to make payments." And she repeated it: "Payments anywhere." The IMF, she said, "will ... look at the exports of a country, the size of that currency in foreign exchange reserves." Executive Board to Decide. Who will decide the issue? The decision will be made by the 24 members of the IMF Executive Board, the day-to-day management body of the IMF. This is not a decision for capitals or for the Board of Governors, nor is it one that the United States can veto. That said, Ms. Lundsager commented that, so far at least, she has not heard of any relevant opposition to including the RMB in the SDR basket. Further, she said that, when it happens, it will most likely be against a background of broad support on the Board. More on Exchange Reserves. Ms. Lundsager talked about an idea that emerged from an Executive Board discussion in 2011. This was that, where the SDR basket is concerned, the IMF should consider a "reserve asset criterion." In other words, it should ask, "how desirable is that [candidate] currency to holders of official foreign exchange reserves?" So, "what have the Chinese been doing lately?" Ms. Lundsager asked that question and then answered it. "They've been inviting official foreign exchange holders to come and invest in the market?" Investor Concerns. A key concern that all investors will have, she said, is, will they be able to get their money out? A major currency needs to be useable for portfolio investment, which--unlike direct investment with its plants, equipment, and employees--needs to be something an investor can withdraw quickly and on short notice. Market Size and the IMF. As for the IMF, it will want to assure itself that the market for RMB is large enough that it will not be shaken by large transactions, lest that vulnerability be transferred to SDRs.
Does the Executive Board have to decide now? Yes and no. They will have to do something this year, probably in November, but they do not necessarily need to decide whether to include the RMB in the SDR basket. They could, for example, simply put off any change in the basket for another year, in which case the current basket of currencies and their weightings would stay as they are. On the other hand, if the Board decides to do an SDR recalibration in November, and if they further decide to include the RMB, that would not necessarily mean dropping one of the existing currencies. They could do that, but they could also just make it a basket of five instead of four. ***
These points are highlights from Ms. Lundsager's talk. They are hardly exhaustive. You should listen to the whole thing. There are two other things she talked about, however, that we need to mention here.
The first was a question she, in essence, put to China: "Do the Chinese really want to be a reserve currency?" Almost certainly it will mean a rise in the value of the RMB and a loss of some control over their markets?
Second, like Stuart Mackintosh who spoke before her, Ms. Lundsager lamented America's failure to okay the IMF reforms of 2010. These are changes both in the governing structure and in the funding of the IMF that the Obama administration favors but Congress has failed to approve. That failure, Ms. Lundsager said, has led to a serious loss of U.S. credibility within the IMF. There is more than a little complexity to this issue, and we will come back to it in a future entry. We'll end this section, as Ms. Lundsager ended her presentation on July 24. "I truly hope Congress can get those reforms done," she said.
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