STAFF NEWS & ANALYSIS
What's Really Behind the IMF's Elevation of the Yuan?
By Daily Bell Staff - December 01, 2015

IMF approves China's yuan as reserve currency … Inclusion in elite list alongside US dollar and euro described as a milestone for world's second largest economy. With the decision, the yuan, also known as the renminbi, will join the US dollar, euro, Japanese yen and British pound next year in the list of currencies the IMF uses as an international reserve asset. – Al Jazeera

Dominant Social Theme: It's about time China and the yuan received their due. Over-time, in fact.

Free-Market Analysis: It is popular in the Western media to bemoan the fall of the West and the rise of the East. Yet what we have here is peculiar: A Western-controlled institution, the International Monetary Fund, facilitating the ascent of China as a great monetary power despite the public paranoia surrounding the advance.

It may not fit certain popular paradigms, but we are not surprised. We have always argued that at the very top of the pyramid, the political, economic and military management of great powers had more in common with each other than the larger mass of citizenry in their respective countries.

Certainly, the news has been met with many plaudits from important people on the economic scene. Christine Lagarde, IMF managing director, reportedly called the decision, "an important milestone in the integration of the Chinese economy into the global financial system."

More from Al Jazeera:

"It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China's monetary and financial systems," she said. The decision by the IMF executive board solidifies China's ambition to see the government-controlled yuan achieve global status as one of the world's top currencies alongside the US, Europe and Japan.

China asked last year for the yuan to be added to the Fund's Special Drawing Rights list. As recently as August, the IMF considered the currency too tightly controlled to qualify. However, IMF staff experts in early November said that China had taken the steps necessary for the yuan to be called "freely usable", opening the way for Monday's decision.

Lagarde cast the decision as one that should improve economic and industrial relations between East and West. The sentiment seems to be that Chinese officials will become more internationally-minded now that the yuan has a central role on a large economic stage.

In commenting on the move, ZeroHedge provided some additional, interesting observations, leading one to believe that the yuan could appreciate considerably over time if conditions proved beneficial.

For instance, inclusion in the SDR basket "can be a catalyst for portfolio reallocation." In other words, capital could flow into yuans as a result of its new position. While managers may choose to hold more reserves in yuan, they may as a result hold less in dollars and euros.

Here, from ZeroHedge:

The reduction in dollar portfolio allocations from the IMF's recognition of the yuan as a reserve currency may prove larger over time than the change in the SDR basket would suggest. Dollar allocations may face greater downward pressure simply because they are so large relative to other currencies – more than three times the size of euro holdings, for example.

ZeroHedge has some cautionary words as well, pointing out that capital has been flowing out of China and it is possible that a yuan ascent could "slam" the Chinese economy and possibly turn what is already a hard landing into a "full-blown global crash."

This may be a possibility if not a probability, but in the longer term there are more significant ramifications, in our view. The biggest one is that the world's capital allocation is shifting and the West is facilitating it.

Such a shift may not inconvenience those who are managing it, but it will certainly have an impact on those who must live with the consequences. As we have often pointed out, it was a Goldman Sachs banker who coined the term BRICS, and we don't think that was any coincidence.

Over the past decade, Brazil, India and China in particular have grown at a tremendous rate. One could argue that there is a tremendous "evening out" taking place that would make an eventual world currency (the dream of our banking elite) far easier to implement. It probably helps to have the yuan as part of the SDR basket as well.

As Europe and the US continually descend as economic and industrial powers, so the BRICS have risen. To see this "larger picture" is difficult, but we would suggest that it is no coincidence. When great powers have parity, economic integration is a good deal easier.

We do not see rivalry here as so many jingoistic pronouncements would have it. We see – behind the scenes – a common cause. More worrisomely, we have the nagging suspicion that a world of equals takes the next step toward globalization via an economic and investing catastrophe.

After Thoughts

In other words, a leveled-out global prosperity will eventually give way to an inevitable worldwide fiscal and monetary catastrophe that paves the way for a truly international economic system. Congratulations, China, and good luck …

Posted in STAFF NEWS & ANALYSIS
  • PatrickHenry1789

    Things are probably going to get very interesting now methinks.

  • Dr. Pepper-Nipples

    The dollar will collapse as soon as we run out of zero’s.

  • Guillaume T.

    In july of this year the BRICS countries launched the New Development Bank which could reduce the importance of the IMF and World Bank for loans to developing countries. The NDB is due to start operations at the end of this year. The yuan inclusion by the IMF could be a reaction to that.

  • Danny B

    The Chinese have said that the SDR is just a temporary phase on the road to a gold standard. They are playing it safe so that they don’t get left out of any plays. The NDB and the AIIB are fallback institutions at the moment. As the Western institutions fail, the alternative institutions will come in to force. China bought 14 tons of gold in October. You can bet that they have big plans for the future. After the bond market collapses, there will be very little confidence in fiat paper of any sort. In the East, only gold will unfreeze credit. The SDR has no long-term future because there is no limit on issuance that isn’t man made. When the West-East gold stops flowing, the value of ALL paper will be re-calculated. The FOREX will die a gory death. The Chinese can well afford to pay lip service to the SDR for the moment. Just as the Japanese rattle sabres in the direction of the South China Seas, most of this is kabuki to entertain the West.

  • Peddle Pusher

    Jim Rickards: All Roads Lead to the IMF; SDRs to Replace Dollar as New World Currency:
    http://www.financialsense.com/contributors/jim-rickards/death-of-money-interview-part-2
    History of World Reserve currency: We all know the petro-dollar is ending.
    http://www.zerohedge.com/article/history-worlds-reserve-currency-ancient-greece-today

    • Barney Biggs

      Depends on who wins the battle. The Chinese have been making multi $billion and bypassing the USD and instead using national currencies. If this trend gains traction It might be the Yuan instead of the SDRs. This acceptance of the Yuan by the IMF is just a stop gap issue for the Chinese. One more nugget in their basket.

  • Barney Biggs

    It would seem to me that the IMF has seen the writing on the wall with China increasingly trading in national currencies with the Yuan as a major player in those trades. The Chinese creation of the Asia Infrastructure Bank with many European countries involved was just another sign along with the BRICS Development bank that the IMF could no longer ignore.

    Some of the BRICS have been buying and hoarding gold for the last few years (Russian 177 tons apparently last year) and with China as the largest gold producer in the world and restricting the export of gold it would seem that they will be moving more and more towards placing gold in the forefront of the world’s economies. With the BRICS ascending in economic clout and their moves in gold I do wonder if and when they will also push for gold to be added to the list of a reserve status. (gross speculation on my part)

    I also would not doubt that with China producing approx 90% of the world’s rare earth and in particular heavy rare earth that is needed to produce wind mills, electronics and high technology that they will also use this to leverage their economic stature. Especially now that the world’s elite are going to push hard for Green this and that including power generation that requires heavy rare earth.

    I am pleased with this because I started accumulating Yuan a year ago with this in mind and it is anybodies guess but I think it will pay off in a year or so.

    • Good luck.

      • Praetor

        Should be accumulating SDRs.

        • Barney Biggs

          Will be interesting to see how much traction it gets.

          • Praetor

            Better to go PMs. You can use PMs to purchase what ever the future world currency is called. All the present currencies will be a fraction of what the face value is. When it comes time to surrender the currencies you hold, they may be worth, let just say not much, but the PMs that is another story, and you may end-up with more wealth than your present currency holdings, just saying. Fiat is Fiat no matter what its called. The world currency will more than likely appear only after the big reset. So, prepare accordingly, when it comes to MONEY!!!

          • Barney Biggs

            OK I surrender that is PMs?

            Too old to start guessing.

          • Praetor

            Barney, its just Precious Metals. Gold, Silver and the like! Why do you think the BRICS are accumulating Gold and Silver? You have money and you can buy Gold and Silver, just like the BRICS! Accumulating SDRs was a joke, you can’t buy SDRs. The BIS pegs all the members currency to the SDRs value, the members can buy as many SDRs as their currencies are worth, and what makes their currencies worth anything is what kind of assets the members have in their possession, Gold, silver, Oil, Land all the assets that another country (member) may want makes the members currency have some value. Its more complicated than that, but that will be the run up to the one world currency, run by the one bank. The Bank of International Settlement is the bank that settles all international DEBT. You don’t pay your debt and your country looks like Greece. Some day there will be no money, just digits on a computer screen!!!

          • Barney Biggs

            Having studied this for years and understand how it works but it is not just gold and silver but for many nations I believe that they are considering it as an integral factor of their wealth.
            I am not willing at this point to concede that the BRICS will go with the Western concepts of banking and concede to the International Settlement Bank. The Bank works well with smaller Western Nations but am waiting to see what happens with the US and its debt which exceeds 19 trillion now and climbing rapidly.. I think that China and some other are also bidding time and watching. As you probably know there are two gold exchanges currently one in London in USD and the other in China and what everybody is trying to figure is just how much gold actually flows through this market. It has also been reported that the tranactions are in Yuan and national currencies.
            There is a shortage currently in silver and outfits like that Canadian Mint limiting production and allocation to precious metal dealers. China has been reported to have received payment for some good in gold. True I do not know but probable. I would still like to know what PMs are?.
            Praetor I just have a different slant

          • Precious metals?

          • Barney Biggs

            Not sure what the question is but here we have a financial program and a component of it revolves around dealer in precious metals, gold silver, platinum, etc. where you can buy and sell precious metals retail.
            He has commented on the radio that their supply of Canadian Mint coinage in silver has been limited and have been told by the Mint that due to a shortage of silver they will be restricted as to the amount they can buy from the Mint.
            While not considered a precious the Chinese rare earths and especially heavy rare earth while also no a mental is a precious mineral due to its usage in high tech items and the majority of it comes from Mongolia.
            If I am responding to the wrong question, let me know.

          • Barney Biggs

            Amazing what a night’s sleep can do. Precious metals PMs

            Many of my friends have been accumulating them for some time directly from the mining companies Good to have balance in investments.

      • Barney Biggs

        I might need it but probably better odds than the lotto

        The problem is that is makes some sense which is usually the kiss of death.

        • When I try to guess at the future exchange rates it goes opposite of my prediction. After the tsunami in Japan I was sure the Yen would weaken with the damage to the Japanese economy and the need for Japan to export. Instead the Yen strengthened substantially with Japanese investments overseas being returned to Japan and the demand for Yen to facilitate that. Understanding that China was holding the the Yuan artificially low I predicted it would strengthen especially as the US were demanding that it did. Well it has but by no means as much as I would have predicted. Plotting it against gold it comes-out on top over 5 years but only just and gold is, reasonable to consider, low.
          See: http://fx.sauder.ubc.ca/cgi/fxplot?b=XAU&c=USD&c=EUR&c=GBP&c=JPY&c=CNY&rd=*&fd=1&fm=1&fy=2010&ld=31&lm=12&ly=2015&y=daily&q=volume&f=svg&a=lin&m=0&x=
          What would be more risky do you think over the coming 5 years, gold at a low or Chinese government paper?

  • TG Molitor

    The money flowing out of China into global real estate is simply astonishing. Is this capital outflow pure speculation or a flight to safety?

    • Our bet is money is just as unhappy in China as elsewhere. The “grass is always greener on the other side.”

      • Barney Biggs

        That is true except in China if you get caught money laundering etc. you die here all is ok.

        When they start selling several month ofter buying and selling for less than they paid for it then you can guess what they are doing. A $50 hit is no big deal when you are laundering millions.
        This is not just one property but going on all over this area.

        • TG Molitor

          I’d say there’s more to the Chinese investment in US real estate than money laundering.

          • Barney Biggs

            Here with billions spend by the Chinese on real estate you might get an argument on that.

            Yes there are those coming over to live (I am friends with some of them) but they use us often as a short term residence until the kids get their education. Many of the Chinese still maintain their businesses in China and fly back and forth. They have nannies for the kids here and the rest of the family stay in China but they buy multi million dollar homes.

          • TG Molitor

            But the DB moderator says “money is just as unhappy in China as elsewhere.” “Unhappy” doesn’t mean 100% money laundering as you have stated.

    • Barney Biggs

      Neither Money laundering.

      Here they are buying numerous homes and now multi million town houses and then leaving them vacant. Some high end homes have grass two ft high and have never been lived in. The house next door was purchased two years ago by Chinese (cannot speak a word of English) Allowed people to live in it free for a bit and it is now on the market for less than they paid for it. Tells you they are just laundering money.

      • TG Molitor

        Check out this article: “Trillions of dollars missing from China’s economy” for some clues to the outflow.

        http://tinyurl.com/zu2k55l

        • Barney Biggs

          Like the trillions missing from the US economy. I have friends over there who are quite astute and while there are some problems, they apparently are transitioning from a primary export driven economy to a consumer based one that it taking some time like trying to turn a super tanker. We are having huge exits of money here as well and much more to come.

          Considering as much info as we will ever get, I think they are in better shape than we are.

  • I guess this will first require the Yuan to remain strong when I imagine commodities (carbon credits for example) can then start to be traded in SDR values which will add relevancy to the ‘basket’. In time the mechanism will take-on the attributes of a single currency between the members with exchange rates between the member currencies being fixed, maybe within a band to start off, and a publicly available means of exchange will be created for digital transactions between parties. This will require the member states (is the EU a state?) to share an ever deepening political and economic union, which will clearly be resisted at many levels but will be driven on regardless, little by little. To then help fuse the parts into a whole, economic catastrophe will occur in one or more of the members (can such a thing be imaginable?). The Chinese have not one thing to fear, it is their form of socialism that is likely to be adopted – that is the generous gift they have to bring along for all to enjoy at the ‘party’.

    • Bruce C.

      I have a question: Are you going to change your name next year?

    • Barney Biggs

      Not sure you would call it a gift but as the Chinese is a controlled economy to a large extent and much of the IMF, World Bank etc. is moving along the same lines this might just happen world wide. You could make the case that the world is developing (or digressing) into two main camps IMF?World Bank vs the BRICS development bank and the Asia Infrastructure Bank.

      Should be interesting.

      • Two sides of the same coin (con)

        • Barney Biggs

          I guess that is pretty much the case.

      • TG Molitor

        Wouldn’t you say that the US is also a “controlled economy”?

        • Anything less than a true spontaneous economic order, be it a command economy, a planned economy, state development planning or, as in the USA, a mixed economy, are always going to be, to varying degrees, state controlled economies. And I would argue that the influence, the degree of that control, becomes immediately very significant to the entire economy no matter how ‘light’ the touch, though, at some point soon, the market become a rump/quasi ‘capitalist’ based economy hobbled by the demands and influences of ‘the state’ and a ‘corporatism’ based economy with capitalists thriving upon their ability to influence and feed from ‘the state’ to their advantage.

          • TG Molitor

            Wouldn’t any country that has a central bank and a monopoly on the production of money be considered a “controlled economy”? If so, by definition, every country on the planet is a “controlled economy.”

          • I cannot think of a country, with or without a BIS based central bank, that does not have some level of state controls, legislation, taxation, stimulus etc. effecting the economy significantly. The description ‘controlled economy’ would sound very far-reaching to me, almost imposable for any state to fully achieve as there is always some economic activity outside of state control, black-market even, battling against state control. So it depends on the intended definition of what a ‘controlled economy’ is – I presume it refers to a ‘command’ or at least a ‘planned’ economy. I would say China is now moving outside of that definition, has become a more liberal/mixed economy than in the past.

  • Praetor

    The worlds a mess! Just getting ready for global depression. The Basel agreements 1/2 and 3, 3 having a full implementation in 2019. Of course, Basel 4 on the horizon. You, just have to look at the Basel committee members and see, ‘who is in’ and ‘who is out’. Those ‘that are out’ seem to be having a great deal of problems with those ‘that are in’s’ (armies). Those ‘that are out’ all seems to be laying at certain longitudinal/ latitudinal lines on the globe. Just another way of looking at if you will. It still looks like 2020 be an important year, but that could be pushed out a little further if need be. Just getting ready for global depression, where the banks are secure and the people are no more!!!

  • apberusdisvet

    The banking cabal is deathly afraid that the Chinese will publish a free market gold price, which would be many times higher than the current $1050/oz. The IMF, as recently as August, refused the Chinese application. So why the change? Could it be that Western gold vaults are almost empty.

    • TG Molitor

      How does the mechanism of publishing a free-market gold price work?

      • Danny B

        AFTER the east has all the gold, they will reprice and offer ?? $ 5,000 ?? an ounce for all new gold. This would be a defacto revaluation of gold.

        • TG Molitor

          How can the East acquire “all the gold”? And by East I assume you mean India and China? Was there a time when the West had “all the gold”? US, Germany, France, Russia, and England had “all the gold”?

    • Bruce C.

      That’s an interesting possibility. IF the gold price (vs the price of physical gold) is being repressed/manipulated then we have a situation similar to the late 1960s in which the US was experiencing a gold exodus as foreign countries were opting for physical gold payments versus US dollars/FRNs because the global market for physical gold was becoming unhinged from the “peg” set by the US Treasury of around $42/oz. The analogy today is the transference of physical gold from Western hands to Eastern because of the discrepancy between between “paper” gold and physical. The odd thing this time is that “the West” doesn’t seem to mind that, which relates to the question posed by this piece (What’s really behind the IMF’s elevation of the yuan?).

      HOWEVER, there remains the logical possibility that the gold price is NOT being manipulated, in which case the physical gold price is arguably too high. The paper gold market is very analogous to the “gold standard” of the US dollar prior to 1974 in which US dollars/FRNs could be exchanged for physical gold upon demand at any bank within the Federal Reserve system. The paper gold market purports essentially the same thing – that upon demand one can exchange one’s ETF shares for physical gold – but just as prior to the mid 1960s few people actually do that. It was the Vietnam War and Pres. Johnson’s “Great Society” program that initiated a marked rise in US deficit spending that the rest of the world considered the beginning of the end of the US empire, hence the rise in the value of gold vs the US dollar. One could argue that that same trend has merely continued since in which gold has risen from about $42/oz in 1974 to now over $1,050/oz, a 25-fold increase. The interesting thing about China’s alleged “free-market gold price” is that if it is higher than the “paper” gold price then that would initiate a further run on physical gold stocks because then “paper” gold/ETF share holders would be expected to demand conversion – physical gold being more valuable than “paper” gold.

      Something is going to give. It’s just a matter of when and exactly how. Stay tuned.

  • Danny B

    China has set the tone for the future. Currency swaps will bypass both the banks and the FOREX. 50% of the cost of the average item that you purchase in America is for the cost of financing. That is 100% markup. China only needs to undercut the parasitic bleed of the finance industry to continue to undercut prices everywhere.

  • Barney Biggs

    Just received and read the note from Casey Research who is saying the US mint has virtually run out of gold coins because of the volume of sales and Silver coins are being sold at record levels. It does appear that some people are beginning to understand that gold and silver and PMs (love that ) are a worthwhile insurance against what many perceive as the coming financial storm in the US and West.

    China/Russia and some others have been hoarding PMs for a few years now and the public here are keenly aware of this.

  • Barney Biggs

    Yesterday read where China and South Africa have concluded an agreement worth 94 billion rand and another agreement in Chinese Yuan and South African Rand. This is interesting as a few years ago most agreements of this type were valued in USDs. This current agreement Puts China in virtually all aspects of South Africa and Russia is not far behind with trade increasing exponentially with South Africa and Africa in general. The move by the IMF is just one more step in furthering the Yuan as a major player in the world and Chinese influence.

    China seems to go along with the Wests dominance of economics until such time as they have the clout to branch out and do their own thing.

    China has been moving into Africa (fastest growng population in the world) in a big way and now control the natural resources in many countries in exchange for infrastructure and financial support.

    THE BRICS have included South Africa for the last 5 years or so and it is one more step by China to move into all continents including the US.
    Interesting to sit back and watch this process over a period of years.

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