Beijing is reviving efforts to broaden use of Special Drawing Rights to achieve longstanding strategic aim of dethroning US dollar in international monetary system
By Zhou Xin
It is just one line in a foreign exchange document, but it signals a renewed seriousness.
Last week, China’s central bank started publishing the nation’s foreign exchange reserves as measured by the International Monetary Fund’s accounting unit, Special Drawing Rights.
The People’s Bank of China is also studying the feasibility of issuing SDR bonds in China.
The SDR, a weighted average of various currencies, was created half a century ago as an alternative medium to the US dollar for governments and central banks to use to hold international reserves, but it never really gained momentum.
Now, with six months to go until the yuan is included in the IMF’s basket of currencies – alongside the US dollar, the euro, the British pound and the yen – China is reviving the earlier attempts.
Beijing‘s renewed passion for the awkwardly phrased reserve asset is all part of its strategic goal – led by the central bank’s veteran governor Zhou Xiaochuan – to end the US dollar’s hegemony; the world’s second-largest economy wants to forge a new global financial order.
“China is embarking, pragmatically but steadily, on a drive to enshrine a multicurrency reserve system at the heart of the world’s financial order,” said David Marsh, managing director and co-founder of Official Monetary and Financial Institutions Forum, a London-based dialogue and research agency. “The SDR … is for Beijing, a useful stepping stone on this long journey.”
The journey to dethrone the US dollar began seven years ago when Zhou published a paper saying that China wanted to explore the possibility of creating a “super-sovereign” currency based on the SDR, to replace the dollar’s anchor role in international money system.
At that time, China had been bitterly complaining about the effects of the US Federal Reserve’s quantitative easing policies.
Many Chinese economists claimed that the US’ influence stemmed from the dollar’s global status, which allowed Washington to solve its own economic woes at the expense of the financial stability of other economies.
“Former US Treasury Secretary [John] Connally once said ‘the dollar is our currency, but your problem’, but it was so unfair for other countries,” said Ding Yifan, a senior fellow at the Institute of World Development under the Development Research Centre of the State Council – referring to the American official’s 1971 comment shortly after US President Richard Nixon’s administration ended the dollar’s direct convertibility into gold.
“China wants justice and fairness in the international money system,” Ding said. “There’s apparently a mismatch between the US economic power and the role of the US dollar – it’s unreasonable and it should be changed.”
Last week’s People’s Bank of China report said the country had 2.28 trillion worth of SDR up to the end of March. In dollar terms, the foreign exchange reserves totalled US$3.2 trillion.
Measuring foreign exchange reserves using SDR could reduce valuation fluctuations and strengthen the role of SDR as an account unit, China’s central bank said in a one-paragraph statement.
Alan Wheatley, an associate fellow of international economics at the British think tank, Chatham House, said the central bank’s move showed two things.
“First of all, they are playing the game as a serious member of the IMF, and secondly, it underlines, perhaps, that it is now tracking the basket, rather than the dollar.”
The idea of China issuing bonds denominated in SDR was “very interesting and potentially significant”, he said.
“The SDR has been a failure – the SDR never took off as a private sector asset … but if China is doing that, then it could be different.”
The SDR has been put on the back burner since 1971, and the collapse of the first system controlling the value of money between different nations, the Bretton Woods system. That left the US dollar as the main currency for international trade, payment and reserves.
That is how it has it remained, apart from the global financial crisis of 2009, when the IMF allocated an additional 182.6 billion of SDR to member countries to supplement global liquidity.
The IMF has reported that there were a total of 204.1 billion SDRs up to March 2016 – less than a tenth of China’s foreign exchange reserves.
The path taken by the IMF and China to raise the SDR’s profile in recent years has proved bumpy.
In February 2011, Dominique Strauss-Kahn, the then-IMF managing director, called for SDR to play a bigger role so that it could challenge the dominance of the dollar.
He argued that “SDR-denominated bonds” could create a new class of reserve assets.
The following month, a special conference was held in the Chinese city of Nanjing, during which then-French president Nicolas Sarkozy, in his keynote speech, called for reform of the international monetary system or a reduction in the role of the US dollar.
However, in May that year Strauss-Kahn was accused of sexually assaulting a 32-year-old maid at the Sofitel New York Hotel. Although all the charges against him were later dropped, he stepped down as the IMF chief, which interrupted the fragile momentum that had been built up around SDR.
After that the dollar became even more in demand.
The share of US dollars in global reserves had reached 62 per cent up to the end of 2015 – up from about 57 per cent seven years ago, at the time Zhou published his SDR paper, according to IMF data.
Ben Bernanke, chairman of the Federal Reserve between 2006 and 2014, wrote in a recent blog: “The renminbi’s inclusion in the SDR confers no meaningful additional powers or privileges on China.
“If your elementary school was like mine, when you did a good job on your homework you got it back with a gold star pasted on top … Like the awarding of a gold star, inclusion in the SDR is almost entirely symbolic.”
The yuan would make up 10.9 per cent of the value of the SDR from October 1 onwards, compared with the US dollar’s 41.7 per cent and the euro’s 30.9 per cent, the IMF decided in late 2015.
However, Beijing – even if the yuan’s inclusion in the SDR was merely the belated recognition of China’s economic might – is now intent on using its economic clout to promote the SDR – and achieve its aim of forging a new global financial order.
On March 31 this year, almost exactly five years on from the 2011 Nanjing conference, Zhou addressed a similarly high-profile symposium in Paris,attended by Christine Lagarde, the present IMF managing director, and the French finance minister, during which he rallied support for the IMF’s quasi-currency.
“SDR can be a stabilising power in the international monetary system,” Zhou said in his speech according to comments published on the central bank website.
“If we act now, if we take measures now, we can lay the solid foundations for tangible future progress. Therefore, broadening the use of SDR is not a difficult thing to do.”
This article (China’s obsession with IMF’s accounting unit and forging new global financial order reaches new heights) was originally published on South China Morning Post and syndicated by The Event Chronicle.