Our topic is the future of the RMB, both the upcoming IMF decision and beyond. But everything happens in a wider context, and sometimes it is important to take note of that as well. Ms. Lagarde, who was born in Paris, did that in her statement on Monday. We hope she is right about the abiding solidarity of the G20 leaders, but solidarity doesn't come easily to countries, and the "abiding" part is really tough.
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On the future of the RMB, this was far from Ms. Lagarde's first indication that she expects the IMF to include the Chinese currency in the basket of currencies that define the IMF's Special Drawing Rights. Last Friday, the staff of the IMF issued a paper for the organization's Executive Board on just that subject, and Ms. Lagarde issued a statement about that report that is worth quoting at length. She said:
"In the paper, IMF staff assesses that the RMB meets the requirements to be a "freely usable" currency and, accordingly, the staff proposes that the Executive Board determine the RMB to be freely usable and include it in the SDR basket as a fifth currency, along with the British pound, euro, Japanese yen, and the U.S. dollar. The staff also finds that the Chinese authorities have addressed all remaining operational issues identified in an initial staff analysis submitted to the Executive Board in July.
"I support the staff's findings. The decision, of course, on whether the RMB should be included in the SDR basket rests with the IMF's Executive Board. I will chair a meeting of the Board to consider the issue on November 30."
Yes, the IMF Executive Board could surprise us all. What seems more likely, however, is that on December 1, we will all be able to acknowledge that Ms. Lagarde had competently ensured that the IMF's decision did not come as a surprise. People knew what was likely to happen. And they will have ample time to prepare, as the changes in the make-up of the SDR won't go into effect until next fall.
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And then the question will come, is this a big deal? Will having the RMB be part of the SDR basket mean much to anyone? In terms of technical functioning of SDRs, the answer is, of course, yes - by definition. But what of the potentially wider, symbolic importance of the decision? That's a matter of opinion, and opinions vary.
The Financial Times argued earlier this week, for example, that including the RMB in the SDR basket would be more "tokenistic" than substantive.
"Being in the SDR basket is neither a necessary nor a sufficient condition for a currency to be widely held in official reserves," they wrote.
At the other end of the spectrum are those who see the RMB quickly rising to great importance, with this forthcoming IMF decision merely a way station to something much bigger. The recent article by
Dimitra DeFotis in
Barron's is in this vein. It appears under the questioning headline
"China: Yuan Will Replace U.S. Dollar?" In her piece, Ms. DeFotis quotes
Jan Dehn of Ashmore Investment Management, who believes that, indeed, the yuan or RMB will ultimately replace the dollar as the top reserve asset. SDRs or rather the SDR currencies are part of his argument too. The four currencies now in the SDR basket are the dollar, the euro, the yen, and the pound sterling, and Mr. Dehn argues that:
"All four central banks that issue these currencies are currently abusing their reserve currency status by printing money through Quantitative Easing (QE) programs, with much of the printing happening because governments cannot pass the reforms required to achieve supply-side led growth. QE policies will eventually lead to inflation and/or currency debasement, which in turn will result in an acute shortage of global reserve currencies with integrity. This bodes well for the rapid adoption of the RMB by central banks."
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We are not sure that these points of view are all that far apart. But if there is a debate going on here - and certainly there is one on the wider issue, i.e., the future of both the dollar and the yuan. We'd like to watch it play out further before deciding who, in our view, has the better argument. What is already clear, however, is that the effort to get the RMB included in the SDR basket is only one element of China's drive to make the RMB a widely used international currency.
Whichever way it goes, the IMF's decision later this month will get a lot of attention, as it should. Just as impressive, however, are the drumbeat of stories about RMB developments around the world, like the one earlier this month from the
Australian Financial Review with the headline
"Sydney tipped to be major RMB trading hub." Written while the Premier of New South Wales,
Mike Baird, was in China, the article makes the point that China could - and presumably will - make it worthwhile for Australian producers of commodities like iron ore and coal to price their products in RMB rather than U.S. dollars. They will do that simply by paying more in yuan than they would in dollars.
Do we know, where all of this is heading? Not really. But is it an issue to watch? You betcha.
