[Below are a few excerpts please read the full text. ~Ron]
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The Tail of the Dragon
How and Why China Delayed IMF Reforms Through Republican Party Donations
By JC Collins
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Every five years the composition of the SDR basket is open for adjustments. During these reviews the initial weights of the inclusive currencies are established but over each period the currencies fluctuate with the daily movements of exchange rates. Appreciating currencies gain a larger share of the basket and depreciating currencies a smaller share.
The last such review was completed in 2010 and at that time the RMB was nowhere near internationalized enough to warrant inclusion in the basket. The next review will be completed by July, 2015, and will likely see the RMB added to the basket as the rate of internationalization has increased dramatically over the last 5 years.
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China could make a strong case that the 2010 Reforms do not go far enough in restructuring the Executive Board of the Fund and the adjusted quota amounts do not accurately reflect the growth of the countries GDP in the 5 years since the agreement was made.
But is that cause enough for China to want the reforms to be delayed?
Perhaps not. But when we consider the growth in not just China’s GDP since 2010, but also the broader internationalization of the renminbi in that same amount of time, there is a stronger case for China wanting to not just delay the reforms, but bypass them altogether.
Failure by the Republican lead Congress to pass the required legislation is quickly leading to a situation where China will get exactly what it stated it wanted back in 2009, namely an international reserve currency which is not directly connected to any one national currency, including there own, and having their currency, the renminbi, added to the SDR basket composition.
The only difference now would be that the RMB will be added to the SDR basket at a much larger and more valuable weight than it would have been back in 2010, if the reforms had been implemented at that time.
The other component of Governors Zhou’s 2009 statement was having a percentage of foreign reserves centralized under IMF management. The fact that the large volume of Bi-Lateral Swap Agreements between the PBoC and other central banks around the world has increased the foreign holdings of RMB does much to help China leverage their currency within the structure of this SDR liquidity exchange.
The longer it takes to implement the reforms the more likely the US will become a less attractive supplier of high quality financial assets, especially if the coming liquidity crisis can be blamed on the unwillingness of Congress to act on reforming the international financial system. The capital losses on central bank “outstanding dollar” reserves will create a demand for alternative financial assets to increase liquidity.
READ FULL: http://philosophyofmetrics.com/2014/11/25/the-tail-of-the-dragon/
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