Mish's Global Economic Trend Analysis |
| China Renews Commitment to Global Easing Party; US Tightening by Force Posted: 23 Oct 2015 12:58 PM PDT Fresh on the heels of an ECB announcement of more QE and the further lowering of the excess reserve rate already at -0.2%, China Nervously Joins Global Easing Campaign. China's central bank cut benchmark interest rates for the sixth time this year in a bid to support an economy which is forecast to grow at its slowest annual rate in 25 years.That last sentence above on downward renminbi pressures echoes what I sated earlier on currency reserves and the desire to hold yuan. For discussion of this tie-in, please see IMF Prepared to Bless Yuan As Reserve Currency; Reason to Celebrate? Any Real Significance? Renewed Commitment  US Tightening by Force Global cuts outside the US are the rough equivalent of US tightening. The world has effectively decided the Fed is not going to hike as much as they want (if at all). In response, other countries force the issue by cutting rates and strengthening the US dollar, all in the mad attempt to gain competitive export advantages. In the competitive QE and currency debasement process, central bankers have blown the biggest equity and junk bond market bubbles in history. When those bubbles collapse (and they will, but at an undetermined time), the world will see another huge round of asset deflation, likely accompanied by significant price deflation. In effect, central banks do not see their misguided price deflation and credit stimulus exercises as the very cause of the weak growth environment the world is in. Mike "Mish" Shedlock | |||||||||||||||||||||||||||||||||
| IMF Prepared to Bless Yuan As Reserve Currency; Reason to Celebrate? Any Real Significance? Posted: 23 Oct 2015 11:32 AM PDT IMF Blessing Coming Up Bloomberg reports IMF Said to Give China Strong Signs of Reserve-Currency Blessing. The IMF has given Chinese officials strong signals in meetings that the yuan is likely to win inclusion in the current review of the Special Drawing Rights, the fund's unit of account, said three people who asked not to be identified because the talks were private. Chinese officials are so confident of winning approval that they have begun preparing statements to celebrate the decision, according to two people.SDR Fact Sheet Inquiring minds are investigating the IMF SDR Fact Sheet for more details and history on Special Drawing Rights. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations.Role and Valuation of SDRs The IMF makes loans in SDRs which in turn can be converted to other currencies. As of today, the total valuation is an equivalent valuation of about $280 billion. The Basket of SDR Rates and Weights looks like this.  IMF Basket Math I added the column in dark blue. If the Yuan were indeed to make up 13-14%, the percentages would adjust accordingly. But assume 14% and do the math. 14% of $280 billion is $39.2 Billion. Certainly nothing to get excited over. I am not quite sure how Standard Chartered Plc and AXA Investment Managers concluded "At least $1 trillion of global reserves will convert to Chinese assets if the yuan joins the IMF's reserve basket." My guess is they assume that when the IMF puts the yuan in the SDR basket, countries will hold more yuan reserves outside of SDRs, a conclusion I certainly would not presume. Global reserves total about $13 trillion in US dollar equivalents. $1 trillion of that would be about 7.69% of reserves. So even if countries started collecting yuan, we are still not talking about a huge portion of global reserves in yuan. Yuan Peg Math The Yuan is pegged to the dollar. As long as that peg is in place, one may as well keep dollars instead of yuan in reserves, assuming the exchange rate is steady. But China recently devalued the yuan. It makes far more sense to hold dollars, not yuan, if one expects another devaluation. Global Reserves
The above Top 10 Global Reserve Countries from Investopedia. The top 10 totals $8.6 trillion out of $13 trillion in reserves. The table is a bit out of date. For example, China's reserves are now estimated to be about $3.5 trillion. It's important to realize that China accumulated those $3.5 trillion in reserves by running a trade surplus with other countries, over the years, heavily US weighted, to that approximate number. Similarly, most of Japan's reserves represent the accumulated trade surplus Japan has with the US. Does China have an accumulated trade deficit with the rest of the world to arrive at the $1 trillion reserve estimate of Standard Chartered Plc and AXA Investment Managers? Mapping China's Balance of Trade Foreign Policy Magazine does an excellent job of Mapping the World's Winners and Losers from China Trade  The deeper the red the bigger the trade deficit. China has a big trade surplus with US, Canada, and most of Europe with the exception of Germany. China has a January-July trade deficit with Germany of about $1.8 billion, $768 million with Japan, and $3.2 billion with Australia. Accumulate such totals for 10 years and one does not come close to $1 trillion. Reason to Celebrate? The reason China celebrates is not because there is any real significance to the IMF's move, but rather because China wants the prestige of being in the elite group of SDR reserve currencies. SDR Concept Meaningless and Useless At $280 billion, SDRs have no global significance. And since any currency is convertible to another instantaneously, at will, the notion of a "basket" as to having any significance is meaningless, regardless of the total! People who discuss baskets of currencies overlook these obvious points, so expect to read a slew of nonsensical reports on the significance of this meaningless announcement. Global Reserve Currency Discussion The Yuan is not about to replace the US dollar as the world's reserve currency. To become the world's reserve currency, a country needs the largest, most liquid bond market in the world, a freely floating currency, free markets, and likely a stable, freely elected government. China does not come close to meeting any requirement needed to replace the US dollar as the world's reserve currency, let alone all of them. Mike "Mish" Shedlock |
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