
I.M.F. Makes China’s Renminbi One of World’s Select Currencies - Q6T46nT668w6i3m
http://www.nytimes.com/2015/12/01/business/international/china-renminbi-reserve-currency.html
======
chollida1
China had to make some concessions to get the yuan into the SDR basket.

Most notably they have committed to issue 3 month T-Bills every week and to
allow foreign central banks to access their currency and bond markets.

Note also that this doesn't take place until October of 2016 so there should
be no immediate impact on the markets. Also note the SDR has a very minor
share of the global currency reserves so this is more symbolic at the moment.

~~~
tomp
> Also note the SDR has a very minor share of the global currency reserves so
> this is more symbolic at the moment.

More (10.92%) than GBP (8.09%) and JPY (8.33%) actually.

~~~
chollida1
Where do you see that SDR is 10.92% of all global currency reserves. I can't
find anything that shows SDR being anywhere close to that amount.

See here:

[https://en.wikipedia.org/wiki/Special_drawing_rights#Allocat...](https://en.wikipedia.org/wiki/Special_drawing_rights#Allocations)

~~~
tomp
Aha, I get it. I misread your statement. I thought you were saying that _CNY_
is a small share of SDR, not that SDR is a small share of _all_ global
reservers. My apologies.

------
adventured
A big deal has been made about this, however it was inevitable and the only
logical thing to do. With the substantial Yen debasement, Japan's economy is
now less than half the size of China's. That will fall to 1/4th in the next
ten years. Even if China were to need to devalue their currency substantially
over the coming years, as is being regularly argued now, that would pale in
comparison to what Japan will do to its currency in the next decade or two in
order to manage their debt disaster. There's no sound argument for keeping the
Yuan out of that IMF basket. The next decade economically will be about the US
and China, with Japan and Russia fading further into the background, and the
Eurozone continuing to struggle with Europe showing zero net growth (the UK
will be a bright spot in Europe thanks to not being part of the Euro (see: the
depression it has put Finland in)).

~~~
vegabook
You are not saying anything original here that is not the complete median view
on the Street. Eurozone 0%: check. UK bright spot: check. Japan a debt
disaster: check. Russia suffering: check. China/US the future: check.

There is nothing here that if followed, will allow anybody to outperform
because this is complete consensus, it's what's priced in almost exactly. Yet
the real alpha-generation skill is to challenge the received wisdom which
here, is light years from happening.

How about the view that the a 9% yield in Russia is actually hugely more
interesting than a 2% yield in dollars. What about the idea that 40$ oil is
cheap as chips and the bargain of a generation? Maybe China's debt situation
is, if we dig a bit deeper than the surface, much worse than Japan's, short
term? Perhaps the UK is a financial bubble far too long of Arab money and that
the Eurozone's current travails represent the small potential for light at the
end of the tunnel on the view of renewal?

Not saying these are true, just that they might be worth considering.

Still, thank you for paraphrasing in one short paragraph exactly what I hear
in my inbox in PDF form 20x per hour from the analyst community.

~~~
adventured
Sure, but you won't catch me disagreeing that the upcoming $30x oil price
isn't a huge bargain. I think it is, and I think numerous oil companies are
going to be tremendous investments at that point. Lots of commodity sectors
are producing huge bargains already, and are likely to get cheaper yet. Anyone
patient enough to hold long-term and suffer through the next few years, will
be rewarded.

I don't think Russia is interesting. They're incapable of doing anything
economically outside of commodities, and so long as the dollar is strong,
Russia will be a mess. Putin has wasted his time in power on consolidating
power, rather than diversifying the economy. They're a _very_ low innovation,
stagnate economy. That has resulted in the facade coming off, it's clear now
that Putin has no clothes and can never cultivate a truly prosperous economy
(their GDP per capita is now below Romania and Poland). It's the typical
command economy outcome. Russian culture seems to spend all of its time being
angry at the outside world for their self-inflicted wounds, creating an us vs
them mentality, and it leads them to the same place every time: isolation.
They have an intense victim mentality, and extremely low national self-esteem
(which is where the projecting comes from and why Putin has to pretend to be a
strong-man when he's the exact opposite).

You watch these documentaries on their culture, and it's almost unbelievable
how backwards they are:

[https://www.youtube.com/watch?v=iZcUsdARY6o](https://www.youtube.com/watch?v=iZcUsdARY6o)

[https://www.youtube.com/watch?v=pv6ROkgsiNs](https://www.youtube.com/watch?v=pv6ROkgsiNs)

[https://www.youtube.com/watch?v=IaoYKoImjys](https://www.youtube.com/watch?v=IaoYKoImjys)

I agree that China is in very, very serious trouble when it comes to debt.
They may be the most indebted nation per dollar of GDP at this point,
including the huge sums of shadow debt stalking around their economy. However,
I think it's more likely they'll stagnate for the next 20 years, Japan style,
rather than suffer any near term sharp event. They've practically copied the
mistakes Japan made perfectly. China's debt will eat most of their growth
potential, until they either grow beyond it enough, or start paying it down.

------
mark_l_watson
Before today, I think the US dollar was about 60% of the SDR bucket of
currencies.

For years I have read about probable problems if the US dollar was no longer
the reserve currency, but it seems from what I have been reading that there is
some sort of negotiated slow migration from the US dollar to using SDRs as the
reserve currency.

I like slow and steady change, even is it means that eventually my country
(USA) will lose a lot of economic advantage.

~~~
JamesBarney
What problems have you read about the U.S. facing if it stopped being a
reserve currency? My understanding is that we would lose seigniorage, and
maybe see a small increase in borrowing costs.

But the upside is value of the dollar would drop, making U.S. exports more
competitive.

~~~
Gustomaximus
IMO US federal debt will likely become an increasingly significant issue.
Interest costs of losing reserve status may be small or large. It really
depends on market confidence. And given historically low rates today,
significant cost increases are not that unlikely if US loses influence on
global of monetary policy. From this large cost increases could put the
currency in a death spiral given ~450 billion annual repayment costs already
at todays low rates.

Please note I'm not saying this will happen, but feel it should be a
recognized risk if borrowing continues at the current trend. I believe this is
an elephant in the room which is likely to cause a massive macroeconomic shock
in 5-20 years. I simply cant see the current political parties making the
sacrifice to address the unfettered debt growth. I too recognize most
financial experts tend to disagree with this view.

------
rrggrr
This story masks BAD news.

[http://blog.mpettis.com/2015/11/chinas-rebalancing-
timetable...](http://blog.mpettis.com/2015/11/chinas-rebalancing-timetable/)

China's debt today is over 200% of its GDP and may exceed 300% in five years.
One hopes the IMF and China agreed on concessions will assist China in
rebalancing its economy quickly, because as Petits' posting points out -- a
disruptive end is near for the current model.

~~~
throwaway4633
Debt doesn't really matter when it's your own currency for your own country.
For example, imagine you control a cult of 50 people and invent a currency
(cultcoin). You can create a debt of 10 billion cultcoins and it won't affect
the real wealth of the residents. What really matters more is the exports and
imports to the outside world, and the value produced by the residents.

~~~
tmlee
When debt is created, wealth is being transferred from the residents to the
government. If the government fails to use the debt created to stimulate the
economy in the long term, the impact will trickle down and the residents will
find themselves poorer and not being able to be competitive enough for the
outside world to demand their goods.

------
mooreds
Note that actually, being a reserve currency isn't all that great, as you cede
some control over your local economy. See
[http://blog.mpettis.com/2014/10/are-we-starting-to-see-
why-i...](http://blog.mpettis.com/2014/10/are-we-starting-to-see-why-its-
really-the-exorbitant-burden/) for more.

~~~
mark_l_watson
Respectfully, I must dissagree.

My country (USA) has benefitted hugely by being the reserve currency:
effectively being able to generate money by fiat with lower chance of this
causing inflation because other countries buy dollars and hold them in reserve
to buy oil, etc.

I expect the economy in the USA will take a small gradual hit over the next
decade as we lose (mostly exclusive) reserve currency status.

~~~
jacobolus
Weakening currency and a bit of inflation would be great for most people in
the US, reducing unemployment, strengthening US experts, and reducing debt
load for all the folks struggling to pay off their mortgages and student
loans. Prices on imported goods would of course rise a bit, but prices on non-
tradeables like healthcare, housing, and education would probably stop rising
so fast, or might even drop a bit. For the last few years now the US has had
too little inflation (this year it’s stuck close to 0%), and too strong a
currency. Getting inflation up to about 2–3% annually (the Fed target is 2%)
would be great.

~~~
nradov
This is nonsense. By that logic every country should continuously weaken it's
currency in order to gain an advantage. So we would get caught in a descending
spiral of every country constantly trying to have a weaker currency relative
to its trading partners. If the USD weakened, which other currencies would
strengthen and how do you think those other central banks would react?

~~~
dragonwriter
> By that logic every country should continuously weaken it's currency in
> order to gain an advantage.

It might be an advantage for most people in the country (at least in the short
term), but it would be a disadvantage (even in the short term) for the people
with the most _wealth_ , and, perhaps more specifically, for the people with
the most power over monetary policy.

The advantages (particularly in the near term) that countries get from
weakening currency is why the people who loan them money have come to insist
than monetary policy should generally handled by independent central banks
that are, while generally accountable in some way to government, also somewhat
insulated from political pressure from the rest of government (and, often,
with direct influence from the financial industry.)

~~~
nradov
You're missing the point. Every country would like to have a weak currency in
order to boost exports. However every country can't have a weak currency
simultaneously; it's mathematically impossible. If the USD weakens then other
countries will respond by weakening their currencies in a race to the bottom.

We will be better off in the long run by not playing that game. Keeping the
currency fairly stable helps to encourage long-term economic growth by
allowing businesses and consumers to plan ahead. That's better than chasing a
quick and unsustainable boost in exports through devaluation.

------
acd
This is how the worlds reserve currencies has looked historically. My personal
guess is that the Yuan will be the next bar in the graph.
[http://azizonomics.com/2012/01/04/a-history-of-reserve-
curre...](http://azizonomics.com/2012/01/04/a-history-of-reserve-currencies-
in-one-graph/)

~~~
dear
I think Gold was the 'global reserve currency' before the 20th century.

~~~
TheLogothete
You are correct, currency and financial systems today are vastly different.
That site seems to be pushing the "THE PETROLDOLLAR IS DYING ANY DAY NOW"
agenda.

~~~
kuschku
Well, because it is going to die.

Holding assets in dollar makes little sense for most people on the planet, and
when these people become richer, it makes sense they will use their own
currencies. With them, their companies. With those, their governments.

The EUR, despite current instability, and the Chinese Y have good chances.

~~~
aianus
> Holding assets in dollar makes little sense for most people on the planet,
> and when these people become richer, it makes sense they will use their own
> currencies.

You have a lot of misplaced faith in foreign central banks. A lot of
foreigners absolutely do not trust their central banks, some even to the point
of using the US dollar in their day-to-day transactions (Cambodia, various
African nations, etc.)

If you're in the position where you don't trust your own central bank, why
would you trust the Bank of China instead of the Federal Reserve? It's been
around a lot less time and does not have the political independence the Fed
does.

The dollar is going to be dominant for the rest of our lives IMO.

~~~
kuschku
Well, for many people it makes sense to trust their own central bank more than
a foreign one, especially when their nation is stable.

No matter what happens, I can pay my taxes and get food at the bakery in Euro.
Even if the Euro crashes.

But if I hold Dollar, my government and bakery won’t take Dollar, so I’d have
to convert – and lose or make money based on the exchange rate every time.

It’s the same reason why bitcoin isn’t effectively used: If you have to
exchange currencies every time you try to buy something, the currency is
worthless to you.

And for a billion chinese people, the Yuan is going to be the currency of
choice. For 500 million europeans, the Euro is the currency of choice.

But only the US and a handful of instable african or island nations use the
Dollar, all combined still less people.

For private holdings, the Dollar is going to lose power. (In fact, it has lost
the majority of private holdings long ago)

------
beatpanda
Does this have an affect on the ability of wealthy Chinese people to move
their money out of China?

~~~
Animats
That's a very big question. China has exchange controls, but only for
residents of China. If you have access to Hong Kong, which the rest of the
world does, you can exchange yuan for other currencies at market rates.

China's exchange controls are leaking at the rate of about $500bn a year.

It's worrisome that China's rich people want to get their money out of China.
China is growing faster than the dollar or euro zones. Yet rich people in
China are overpaying for US and UK real estate. What do they think is going to
go wrong in China?

~~~
caskance
They think they will be charged with corruption and they'd like to own homes
and assets in other countries that won't be seized when that happens.

~~~
thaumasiotes
A few years ago there was that entrepreneur who was executed (!) for seeking
funding improperly. I'm not sure guarding against seizure _in the case of
corruption charges_ is what people are thinking of; corruption charges might
be unrecoverable.

~~~
caskance
If he were living in Vancouver, the Chinese government would likely have not
been able to execute him. And not everyone gets capital punishment.

------
vxxzy
What implications could this have for oil? Isn't oil bought and sold using US
Dollars? I've always heard the World "Does Business" in US Dollars. Is this
the beginning of the end for the Dollar as an international norm?

~~~
adventured
Modest implications. No more than the Euro or Yen at their peaks did.

No, it's not even remotely close to the end of the dollar as the international
norm. The dollar is stronger today than it has been in 20 years, and it's
gaining strength as the Eurozone and Japan are a mess.

The most likely outcome to this, is that the Yen loses the position it has
held on the global stage for the prior 30+ years or so. Japan is the nation
that will suffer the most as China's currency rises. Right now Japan is
depending on the Yen as their only remaining prop to use against their debt;
the weaker the Yen's global position, the less they can spread that debt
monetization cost around. China's currency will become the dominant Asian
currency; the Euro will remain the dominant European currency (unless
something unexpected - and worse than it has already absorbed - happens to rip
the union apart (that could be Finland bailing, triggering other nations to
leave as well)); the dollar will remain the global reserve currency (there
needs to be one, and the West is far more comfortable with that scenario than
becoming more reliant on China, as are Japan and numerous China competitors in
Asia).

~~~
the-dude
> The dollar is stronger today than it has been in 20 > years

As far as I remember the US Dollar was about 1.25 the value of the Euro at
it's peak in 1999/2000.

We traded in dollars at the time.

~~~
adventured
The Yen was a credible currency in 1995, and it's now in _much_ worse shape
(both today and its outlook). The Euro was widely expected to pose a challenge
to the dollar globally, which has not happened at all.

The dollar is as strong as it is even with 0% interest rates. Imagine if rates
were even half the levels they were 20 years ago. I'd definitely make the
argument the dollar is stronger today than it has been since the late 1990s
when the US economy was riding very high.

In the next few years, most likely the dollar will gain more strength (the US
budget is currently under control, growth is ok, and the employment picture
continues to strengthen spurring tax growth), the Euro will be debased with
more QE in mostly futile attempts to spur Eurozone growth, and the Yen will
lose a lot more value. The Yuan is also likely to face significant devaluation
as China struggles to grow in real terms, but it will at least see greater
global share. Things are looking great for the dollar at least for the next
ten years.

~~~
the-dude
> The Euro was widely expected to pose a challenge > to the dollar globally,
> which has not happened at all.

The dollar was trading at about 0.75 to the Euro around 2009. What is a
challenge in your eyes?

Anyway, these are just opinions ( yours and mine ). Mine: no US rate hike in
the foreseeable future, QE4.

~~~
adventured
The Euro has acted as a strangling device for everyone in the union not named
Germany. For Germany, it has enabled them to ride an artificially cheaper
currency with their exports (were they using their own currency, it would be
far more expensive). For Italy, Spain, Portugal, Greece etc, the currency held
them back by being even more expensive than their own currency would have
been; for eg Finland, it has prevented them from making adjustments to become
more competitive on numerous cost structures. The end result has been eight
years of no net economic growth (and in recent dollar terms it's now far worse
than that).

The lack of Eurozone growth will spur more QE for years to come. The US is
presently done with its QE program, and there's nothing on the horizon that
indicates it'll need to return to that in the next several years (large budget
deficits would cause that, but so far Congress isn't growing spending in an
out of control manner).

That context will push the Euro lower, and the USD higher versus. Until the
Eurozone can show off serious growth (not 0.3%-0.5% type 'growth'), rapidly
improving household balance sheets, and a significantly improving employment
picture (not 11%), the Euro will struggle.

~~~
tormeh
You're mostly right, unpleasant as that is in this case. One thing's wrong
though: The ECB doesn't really have to care, and historically haven't cared,
about growth and unemployment. The ECB is printing money because inflation is
low, not because growth is low.

------
zkhalique
I always said the dollar will lose its position as an outlier eventually.
Reversion to the mean.

------
AC__
While you present a compelling argument, I must respectfully disagree. I may
catch some flack for saying it, and many people refuse to believe it, but the
U.S. is insolvent. The value of the U.S. dollar is artificially propped-up.
How long do you truly believe the Russias and Chinas of the world are going to
keep using greenbacks? They will feign WWIII, Israel will expand to encompass
'Greater Israel' and U.N. will formally install global government, and USD
will cease to be de-facto global currency.

~~~
adventured
Insolvent you say? The US owns 45% of all global wealth (per Allianz's global
wealth studies, it was ~50% pre great recession, fell to about ~39% in 2010 as
the US suffered heavy asset declines, and has rebounded back to around ~45%
with the recovery in the US economy, that gap is mostly the arrival of China's
wealth). The US is massively solvent in fact. Furthering this point, the US is
now growing as fast as China in real terms (given pretty much every credible
study indicates China is at least lying about half of their growth); the US is
also gaining substantially against most of Europe, as its economy continues to
grow faster than Europe even with a stronger dollar. South America and most
emerging markets have been thrown into near-depression status, due to the
stronger dollar. The US economy is likely to enjoy a very nice 10 or 20 year
run in fact.

Russia's economy is now - as of the latest 2015 numbers - 1/12th the size of
the US economy. It no longer matters as a global economic _power_ (it still
matters as a global commodity player). Its economy is smaller than Canada's
now.

China will continue to use greenbacks because they will never have any other
choice, the same as they'll continue using Euros. The US is back to being
China's biggest trade customer (with the dollar having gained so much value):
that trade is mostly done in dollars and that will continue.

~~~
AC__
AF [http://www.usdebtclock.org/](http://www.usdebtclock.org/)

~~~
adventured
That's a terrible argument.

You're talking about public debt, which is a small fraction of all US wealth
holdings (household + corporate + government), and can be trivially managed.
Further, unlike a lot of countries, the US has significant spare taxing
capability (it rests in the middle tier globally on taxation). The US could
easily raise $200 billion in new annual income taxes on the top 25% and not
miss a beat - that single move alone would handle any potential issues from
the public debt cost. Or better yet: the US can constrain its spending growth
(as it has been), allowing income and assets to continue to outrun the
problem.

And of course the US owns the global reserve currency, which enables it to
export inflation to the rest of the world as a means to reduce the domestic
hit of things like QE (which is why the Eurozone's QE hasn't been as
effective). When the US uses the dollar to improve its fiscal circumstances,
the rest of the world foots a big part of the bill. While that's sort of like
cheating, it's an advantage the US possesses that nobody else does.

~~~
AC__
You're wrong. I believe you're referring to this statistic: "... 0.7% of the
global adult population, and they account for 45% of global wealth"[1] The
U.S., ON PAPER, holds about 1/4(25.40%) of global wealth not half. [2]

[1] - [http://fortune.com/2015/10/14/1-percent-global-wealth-
credit...](http://fortune.com/2015/10/14/1-percent-global-wealth-credit-
suisse/)

[2] -
[https://en.wikipedia.org/wiki/List_of_countries_by_distribut...](https://en.wikipedia.org/wiki/List_of_countries_by_distribution_of_wealth)

~~~
adventured
I'm not wrong in fact.

"Some 39 percent of the world’s wealth belongs to Americans, while Western
Europe accounts for another 31 percent."

And that was before the huge asset rebound in the US, and was a drop of 12%
due to the great recession.

[http://economix.blogs.nytimes.com/2010/09/14/americas-
domina...](http://economix.blogs.nytimes.com/2010/09/14/americas-dominance-of-
global-wealth-is-slipping/)

Allianz's 2015 report indicates North America holds 45% of all global
financial assets. Unless you're pretending that Canada and Mexico hold 20% of
all global assets, your figures are wildly off the mark (Canada is less rich
than the US per capita on average, and Mexico is far less so); at a minimum
the US holds 40% to 42% of all global wealth.

[https://www.allianz.com/v_1443702256000/media/economic_resea...](https://www.allianz.com/v_1443702256000/media/economic_research/publications/specials/en/AGWR2015_ENG.pdf)

