China has 4 Big banks in the top 10 of world of finance (more than any other nation) that includes Industrial & Commercial Bank of China Limited , Beijing , China at the top of all the world’s banks according to http://www.accuity.com/useful-links/bank-rankings/ .
Can we expect China’s Renminbi (RMB) to Join IMF’s Basket?
Short of a war declaration or bank holiday expect the announcement of the RMB entering the IMF’s basket of currencies along with increased number of votes (currently China has 81,151 votes, less than Italy in the IMF)
See earlier posts: Financial Control Tug-o-war ~Ron
Will The Dollar Lose Its Reserve Currency Status To An SDR Currency?
Since the SDR is just an aggregate of fiat currencies, it cannot really change the fundamentals of the current status quo.
Many observers believe the U.S. dollar (USD) will lose its status as the world’s reserve currency sooner rather than later. Proponents of this view often mention China’s agreements with various trading partners to settle trade in their own currencies rather than the dollar as evidence of this trend.
More substantial evidence can be found in the diversification of reserves held by many nations. The euro now makes up about a fourth of all currency reserves:
Here is the IMF (international Monetary Fund) page on voluntarily reported currency reserves: Currency Composition of Official Foreign Exchange Reserves (COFER). Note the large amount of reserves that are not “allocated,” i.e. the currency being held is not specified.
Some see the replacement of the U.S. dollar by some other currency as a welcome development, not just for the world economy but for the U.S., as the reserve currency has substantial burdens. Regardless of whether such a replacement would be positive or negative, many analysts see no plausible alternative to the USD as the primary reserve currency for a host of reasons.
Another camp sees China’s purchases of gold as paving the way for China’s currency (renminbi a.k.a. yuan) to replace the dollar as the global reserve currency. Those who have studied China’s policy makers doubt this is the goal; rather, they see China as most likely pursuing a multi-polar world in which no one nation issues the reserve currency.
One set of observers has long held that the ideal replacement for the dollar is a hybrid currency issued by the IMF called SDRs (Special Drawing Rights). The IMF describes the SDR thusly:
“The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies.”
The four currencies are the U.S. dollar, the euro, the Japanese yen and the British pound. China is widely seen as working toward floating the renminbi (that is, no longer pegging it to the dollar) so it could be included in the SDR currency.
The SDR seems to many to be the ideal replacement of the USD as the reserve currency, especially if China’s currency joins the basket of currencies that make up the SDR.
Though the advantages of a multi-currency basket are fairly self-evident, questions remain if the SDRs are a realistic or practical option. These questions come to mind:
1. Since the SDR is just a basket of currencies, doesn’t it simply aggregate the weaknesses of all fiat currencies? In other words, what happens to the value of the SDR when priced in gold, oil or other commodity if every nation in the basket prints its currency with abandon? The SDR will lose value just like any any fiat currency, because it is simply a composite fiat currency.
2. Couldn’t a nation simply hold all currencies in the SDR in the same percentages as in the SDR basket? Clearly, this is possible: a nation could acquire the same basket of currencies held by the SDR and in the same weighting. In that case, what is the purpose of the SDR?
3. What happens to the relative value of one of the constituent currencies in the SDR if the issuing nation experiences a currency crisis or devalues its currency by one means or another? Clearly, the relative weighting of that currency would decline within the SDR basket.
The SDR, then, does nothing to impede currency crises or devaluations; it is simply a risk-management tool that works by diversifying the risk of holding too much of any one currency. But since any nation can pursue the same risk-management strategy directly by diversifying its reserves with multiple currencies, what’s the point of holding SDRs as a risk-management tool?
4. Since the SDR is just an aggregate of existing currencies, it is not an independent currency. An independent currency would need to be supported by either enforceable taxation rights or some commodity or basket of commodities: gold, for example, or a “bancor”-type basket of commodities (gold, oil, grain, etc.) owned by the issuing nation/entity.
(Another potential independent currency that could serve as a reserve currency is a non-state issued digital currency such as Bitcoin: Could Bitcoin (or equivalent) Become a Global Reserve Currency? (November 7, 2013). Digital currencies’ valuation is based not on taxation or gold but carefully managed scarcity.)
Since the SDR is just an aggregate of fiat currencies, it cannot really change the fundamentals of the current status quo.
Boiled down to its essence, the SDR is presented as a shortcut solution to deeply seated problems. The reserve currency problem cannot be fixed by a basket of fiat currencies, as fiat currencies (and the trade imbalances they generate) are the problem.
Powell: “I recently made fairly detailed presentations to two Asian central banks. But I would like to share some absolutely remarkable information that was conveyed to me by two central bankers….
We can see these gold outflows from the West, and we can also see the inflows to the East. We don’t know exactly when the metal will run out, but we do know we have seen this movie once before. This is exactly what happened when the London Gold Pool was drained.
The pool collapsed and there were emergency US Air Force transport flights, according to the Federal Open Market Committee Meeting Minutes, flying gold over from the United States to the Bank of England in 1968. This was at a time when the Bank of England was advancing its own gold into the market on behalf of the United States, in an attempt to hold the gold price at $35 an ounce.
In March of 1968, the outflow of gold had reached hundreds of tons per week. At that point, the nations participating in the Long Gold Pool realized they had only a few weeks’ worth of gold left at that staggering rate of outflow. So, they closed the London Gold Pool.
The dollar price of gold literally failed at that point. The price of gold was $35 an ounce of gold one day, and the next day there was no price at all because there was no official market. I suspect that either that will happen, and the gold that is available will run out, or more likely the central banks will see what’s coming and arrange an international currency revaluation. At that point there will be chaos in the gold and currency markets, but in the end this will mean substantially higher gold after the official reset of the international gold price.”
Hey Ron, thank you very much for sharing. Hope you are doing good?
Have a great day,
Happy greetings Chris!
Is there a local farm or community farm near you?
Have you a food garden?
I have been challenged to personalize my food; which simply means: Yes, I can know where my food comes from and I can avoid corporate food hazards (GMO/pesticides/additives/etc.).
Be well & joyful my friend,
China is the world’s most populous country with a fast-growing economy that has led it to be the largest energy consumer and producer in the world. Rapidly increasing energy demand, especially for liquid fuels, has made China extremely influential in world energy markets.
China has quickly risen to the top ranks in global energy demand over the past few years. China is the world’s second-largest oil consumer behind the United States and became the largest global energy consumer in 2010. The country was a net oil exporter until the early 1990s and became the world’s second-largest net importer of crude oil and petroleum products in 2009. The U.S. Energy Information Administration (EIA) projects that China will surpass the United States as the largest net oil importer by 2014, in part due to China’s rising oil consumption. China’s oil consumption growth accounted for one-third of the world’s oil consumption growth in 2013, and EIA projects the same share in 2014.
Read More: http://www.eia.gov/countries/analysisbriefs/China/china.pdf
Britain to Use Chinese Currency as Foreign Reserve
Mark this as another blow for the dollar.
This past week, the British government announced plans to begin issuing bonds that are denominated in Renminbi (RMB), China’s national currency. The proceeds from the sale of these bonds will finance the UK’s foreign currency reserves.
China’s presence on the global economy continues to grow, and concerns about the Euro Zone and the United States are still lingering after recovery from the Great Recession has been timid at best. The UK is looking for a leading currency to hitch their wagon to. This isn’t just speculation — prominent British officials are openly admitting it.
“Their currency is going to be used around the world.”
George Osborne is the British Chancellor of the Exchequer (which is roughly equivalent to the US Secretary of the Treasury). After meeting with the Chinese Vice Premier, Ma Kai, Osborne brokered the Renminbi-bond issuing as a proactive step towards accepting the RMB as a major global reserve currency.
“Let me be clear,” stated Osborne. “As China becomes a bigger and bigger part of the world economy, their currency is going to be used around the world. We here in Britain understand that, and we want to be the first country in the west to seize the opportunities that it will bring.”
This is a monumental shift in global attitudes, but not one that is completely unexpected. Ever since the Breton Woods system was instituted following WWII, the United States has simultaneously abused its position as a global economic leader and pursued inflationary policies that have significantly weakened the dollar.
And now America’s closest ally has begun to hedge its bets by moving towards the RMB.
“The UK government intends to be the first national government — outside of China — to issue a bond in China’s currency. We issued bonds in US dollars before, and now we will be issuing a bond in RMB,” continued Osborne.
Significance of RMD Bonds in UK
So what exactly does the UK intend to do with billions of RMB? The exact course of action pursued by the British Government will be closely watched by the entire financial world. These events are far more significant than, say, Russia or Iran moving to use more RMB. This is a traditional western power that is acknowledging the pending financial supremacy of the east.
If the UK is angling to become a major center of Renminbi trading, which this seems to signal, the demand for Chinese currency will continue to look more promising moving forward than the dollar or the euro.
The United States may act to try to corral its economic allies and preserve the reserve-currency status of the dollar, but there is no guarantee that anyone is listening anymore. Clearly, the British believe that they can generate more jobs and more investment through RMB purchases than they can through greenbacks.
This also suggests that the UK is angling towards not joining the EU as a full member, which is an entirely different (though not unimportant) issue.
What this Means for the Dollar
Britain is now the fifth country to allow direct currency trade in Shanghai (following Australia, New Zealand, Japan, and even the United States), and the train that is the Chinese monetary revolution keeps chugging along.
Is this move a definitive nail in the coffin for the dollar? Probably not. The US has 70+ years of entrenched financial agreements. The rate at which those seem to be unraveling, however, is startling. This is another example of that.
The timeline is not clear, but the trendline is. The days of the dollar dominance are dwindling, and savvy investors are going to follow the UK’s lead and begin hedging their dollar bets.
When the dollar loses, gold gains. Use our resources to learn about responsible and tax-advantaged ways to use precious metals to your advantage. Sign up for our Free Investor’s Kit, provided by Regal Assets, and start protecting your future today.