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CHINA'S BID TO BECOME AN IMF RESERVE CURRENCY IS A FALSE GOAL. [Copy link] 中文

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Post time 2015-4-27 05:48:52 |Display all floors
With all the hallaballoo in the Western media about China's bid for the Renminbi to be one of the exclusive four currencies that are used to determine the Special Drawing Rights (SDR/XDR) of member countries, the FACT is that these SDR's, better called by its alternate acronym XDR's, are nowhere close to being "Super Dollar Reserves" but in fact, account for less than 4% of global foreign exchange reserve assets.  XDR's have therefore been labeled by the IMF itself as an "Imperfect Reserve Asset".

If China wants to benefit from the Yuan becoming a foreign currency reserve asset of other countries, in order to earn interest on the Yuan-denominated loans to countries in need of a foreign currency reserve in order to validate its own fiat currency, then trying to achieve that goal through the IMF's SDR would be like an elephant trying to enter a keyhole.

Used as a pretext to overvalue the Yuan to the detriment of China's domestic manufacturers, whose products have become overpriced abroad in dollars, and also overpriced inside China herself in Yuans compared to imports, the whole nonsense is equivalent to a humbug paying the price of a Mercedes Benz for a Voksvagen Beetle, and patting his own back that he has proved he can afford a Benz, all the while still getting nothing more than a Beetle.

The current economic and monetary team needs to have their heads examined.

The Yuan is doing fine without having to be overvalued against the US dollar, because when it is left alone to match the market demand and supply, its exchange rate would have naturally drifted to between 6.50 to 7.00 CNY/USD, which would expand China's exports, which is now CONTRACTING due to its overvaluation of the Yuan - exports being another cardinal criterion for admission to the select grounp of IMF's reserve currency basket for its XDR (Imperfect Reserve Asset, according to the IMF itself) - so how can China hope to join the company of clowns when in trying to buy itself a clown's costume, it loses its clown's cap in the process?

Furthermore, even if the IMF agrees to give China's currency a 6% allocation of the reserve currencies underlying the XDR, that is still half of what Japan or UK already has.  And look at their banking and trade balances - their results are WORSE than China's without being one of the sellect reserve currencies UNDER THE IMF.

Now, I am not against the Yuan becoming a GLOBAL RESERVE CURRENCY.  That is, one that other central banks keep as a reserve in case it needs to settle trades and loans with China in the future, to hedge against fluctuations in the exchange rates of the other major currencies, like the dollar, euro, yen and pounds sterling.  The Yuan can, in fact, become a GLOBAL RESERVE CURRENCY by simply devaluing the Yuan to a market-clearing exchange rate, where its exports are fully sold out, to fulfill the demands of the world, and that exchange rate is not the current exchange rate, but rather one between 6.50 to 7.00 Yuan/Dollar.  When other countries need to pay for their imports from China or to pay their loans denominated in Yuans that China lends to them, they WILL AUTOMATICALLY KEEP THE YUAN AS ONE OF THEIR RESERVE CURRENCIES, not because the IMF has approved it, but because THEY NEED IT TO HEDGE AGAINST THE RISKS OF HOLDING OTHER CURRENCIES AND DEFAULTING ON THEIR DEBTS TO CHINA, OR BECOMING UNABLE TO IMPORT NEEDED GOODS FROM CHINA.

So, how can China benefit MORE from a very restricted, and non-market-oriented IMF-controlled XDR, by giving up a more market-oriented, freely usable, freely tradable Yuan?  Achieving reserve currency status in the IMF is acheiving it for only 4% of the global reserve currency assets, and does not really achieve what China intends, which is to achieve the reserve currency status of the dollar, which takes more than just IMF blessings to achieve.  As a global fiat currency, it requires a global defense budget of one trillion dollars to sustain, and many more trillions to establish, clearly not in the interest of China to attempt, nor necessary, for China in order to obain a much larger share of the reserve currency market amongst the central banks of the developing countries.

Keep the Yuan low at 6.50, and join the Bandung Conference, should do it all.  Period.









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Post time 2015-4-27 06:11:27 |Display all floors
This post was edited by abramicus at 2015-4-27 16:29


Currency

2014

US Dollar

62.9%

Euro

22.2%

Pound Sterling

3.8%

Japanese Yen

4.0%

Canadian Dollar

1.9%

Australian Dollar

1.8%

Swiss Franc

0.3%

Others

3.1%


Source:  Wikipedia - Reserve Currencies

Here is the ACTUAL currency composition of official foreign exchange reserves held by all central banks of the world in 2014, only less than 4% of which are held in IMF's XDR's, which would not make any dent at all in the real world, even if China were to take over 6% of this 4%, i.e., even if the Yuan is included amongst the five currencies that form the basket of the XDR's of the IMF, China's share would have been only 0.24% of the real total global foreign currency reserves.

Thus, all the effort to please the IMF by keeping the Yuan overvalued for 3 years was a useless errand, whose maximum benefit to China, is to capture an extra 0.24% of the foreign currency reserves of the central banks of the world.

The US Dollar remains the dominant reserve currency of the world, irregardless, and thus China's efforts are totally wasteful of export earnings that otherwise would have been earned by China's manufacturers, worth hundreds of bilions of dollars over the past 3 years or more.  If overvaluing the Yuan makes only at most a 0.24% difference in the amount of Yuans that are used as reserve currency by the rest of the world, then why is China holding down the export profits of its manufacturing sector to the tune of losing hundreds of billions of dollars year after year due to inabiity to sell its products abroad because their products are overpriced in dollars?  Einstein was reported to have said that insanity is repeating the same mistake over and over again, and expecting a different result.




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Post time 2015-4-27 17:00:46 |Display all floors
THE HOW AND WHY OF INTERNATIONAL RESERVE CURRENCIES

The history of using another currency as one's reserve currency was derived from the belief that the reserve currency is exchangeable for gold on an instant's notice.  Ever since Nixon closed the gold window in 1972, that basis for any currency being a reserve currency no longer exists.  But why then do we still have reserve currencies?  

Because while gold is universally exchangeable and holds a relatively steady value over time, there is another commodity which smaller countries need all the time, even if it is not as exchangeable as gold, and that is their national security.

If one country is strong enough to guarantee the security of another country from any external or internal threat, then it becomes the guarantor of the value of the currency of the country it protects, and thus its fiat currency becomes the reserve currency of the country protected by it.

Thus, the British Pound, even if not interchangeable with gold, can remain the reserve currency of many of its ex-colonies, much as the Dollar can be the reserve currency of many defenseless countries, during and after WWII, particularly if these countries remain at risk of being overrun or subverted by hostile forces or nations.

These kinds of reserve currencies should be called "Fiat Reserve Currencies" (FRC), because their raison d'etre is their military might in guaranteeing the security of their subscribing countries.  When Fiat Reserve Currencies are accepted by a large number of countries that depend on its issuing country for a guarantee of regime survival, they become GLOBAL FIAT RESERVE CURRENCIES.

If Chna becomes strong enough to guarantee the survival of regimes around the world, it too can become a Global Fiat Reserve Currency to these countries at the least.  

On the other hand, if China chooses not to use its military might to guarantee the survival of a foreign government and its domestic currency, its currency cannot be a Fiat Reserve Currency to that country.  But nevertheless, the Chinese Yuan can still be a reserve currency of that country for other entirely different reasons, such as if that country needs to import goods from China for consumption by its people, or otherwise there would be runaway inflation, or if that country exports goods to China and was paid in Yuans that it de facto has to keep as its reserve currency, pending some expenditures it has to make in Yuans.  The trading partner of China would voluntarily keep some Yuans in reserve, in case the exchange rates of the dollar, euro, pound or yen fluctuate too much, to avoid what is called the Exchange Rate Risk of its transactions.  This kind of reserve currency, we can term "Trade-Induced Reserve Currency" (TIRC).  

Thus, China can achieve a global reserve status for the Yuan, either by spreading its defense network around the world, to guarantee the survivability of foreign governments, costing about 1 trillion dollars a year to achieve, and making the Yuan another Global Fiat Reserve Currency (GFRC), or China can achieve a global reserve status for the Yuan by trading with all countries in such a high volume that its trading partners would want to keep Yuans in reserve, to hedge against the fluctuations in the exchange rate of the other major currencies, making the Yuan a Global Trading Reserve Currency (GTRC).  This costs almost nothing net for China to achieve, because by merely doing high volume profitable trade with other countries, it earns this function for the Yuan without having to pay any admission fee.

To achieve GTRC, rather than GFRC, China has to continue to export to the world using its cheap labor and advanced technology as value-add-ons to all of its products.  High volume profitable trade in itself will make the Yuan an international reserve currency, without needing to use any force.  The percentage of the global reserve currencies that China's GTRC represents could even exceed the GFRC's of other countries, without costing China a dime in terms of blanketing the planet with its military outposts.  Thus, the diversion of China into trying to achieve a tiny 0.24% quota of IMF reserve currencies, is a false lead, a false goal, and a futile errand.  China should have been doing the opposite of overvaluing the Yuan.  China should have let the Yuan devalue to its market-clearing value which is between 6.50 to 7.00 Yuan/Dollar exchange rate.  This would boost China's exports and hasten China's rise as the world's foremost GTRC, rather than becoming the world's foremost GFRC, costing a trillion dollars to maintain annually.

It is time for China to quit the IMF Reserve Currency Beauty Contest, devalue the Yuan, and begin the export drive to make China the number one GTRC instead.

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Post time 2015-4-29 16:00:49 |Display all floors
This post was edited by abramicus at 2015-4-29 16:13

CHINA SHOULD CAPITALIZE ON HER COMPARATIVE ADVANTAGE OF CHEAP LABOR DUE TO HER LARGE POPULATION AND CONTINUE TO EXPORT HER MANUFACTURES TO THE REST OF THE WORLD, ON THE BACK OF A YUAN THAT IS NEITHER OVERVALUED NOR UNDERVALUED, BUT MARKET-VALUED, WHICH IS, THE EXCHANGE RATE THAT CLEARS THE MARKET OF GOODS CHINA WISHES TO SELL AND GOODS THAT THE REST OF THE WORLD WISHES TO BUY, AND EMPIRICALLY, THAT EXCHANGE RATE IS BETWEEN 6.50 AND 7.00 YUAN/DOLLAR.

ONLY WHEN THE REST OF MANKIND WANTS TO OWN SOME YUANS IN ORDER TO HEDGE AGAINST THE FLUCTUATIONS IN THE VALUE OF THE DOLLAR, EURO, YEN AND POUND, BECAUSE OF THE GREAT VOLUME OF TRADE THEY HAVE WITH CHINA, WILL THE YUAN BECOME A DE FACTO RESERVE CURRENCY, NOT BY FIAT, BUT BY ITS FIDELITY TO ITS PROMISE TO DELIVER QUALITY GOODS AT AFFORDABLE PRICES TO EVERY COUNTRY, OF EVERY RACE, AT ALL TIMES.

TRYING TO IMITATE THE FIAT RESERVE CURRENCIES BY EITHER APPLYING TO JOIN THE INSTITUTIONS THEY ESTABLISHED TO PRESERVE THEIR STATUS AS FIAT CURRENCIES, LIKE THE IMF, OR SPENDING A TRILLION DOLLARS A YEAR TO MAINTAIN MILITARY SUPERIORITY OVER THE REST OF THE WORLD, IS NOT ONLY UNNECESSARY AND FUTILE, BUT ALSO ABSOLUTELY DESTRUCTIVE OF THE WELL-BEING OF THE CHINESE ECONOMY AND ALSO THAT OF ITS TRADING PARTNERS WHO DEPEND ON CHINA'S CHEAP PRODUCTS TO AVOID DOMESTIC INFLATION.

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