SDR - New World Money

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(Part 2) - China’s current G20 leadership could well be used to ‘launch major reforms of the global monetary system’


http://www.cdfund.com/wp-content/uploads/2016/08/SDR-Special-aug2016-DEF.pdf


So there you go, to include a commodity like gold into the SDR as a sixth currency component could help to make the SDR, ’more neutral to global cycles and more representative of the shift in economic power witnessed over the last two decades’.

The idea of adding gold to the SDR was also studied by professor Catherine Schenk in 2011. According to her study to ‘re-introduce a role for gold in the international monetary system’ it would ‘provide a counterweight to the impact of the depreciation/appreciation of the U.S.$’, and could ‘reduce vulnerability to the USD exchange rate’. 8
Professor Robert Mundell, a special advisor to the Chinese government, is also in favor of bringing gold back in to the monetary system:9
‘There could be a kind of Bretton Woods type of gold standard where the price of gold was fixed for central banks and they could use gold as an asset to trade within central banks. The great advantage of that was that gold is nobody’s liability and it can’t be printed. So it has a strength and confidence that people trust. So if you had not just the U.S. but the U.S. and the EU (area) tied together to each other and to gold, gold might be the intermediary and then with the other important currencies
like the yen and Chinese Yuan and British pound all tied together as a kind of new SDR that could be one way the world could move forward on a better monetary system.’

So plans for substituting dollars for SDRs and linking SDRs to gold have clearly been around for quite some time. But when can we expect the SDR to become more openly promoted? José Antonio Ocampo, former minister of Finance of Colombia, recently published an interesting article in which he explains China’s current G20 leadership could well be used to ‘launch major reforms of the global monetary system’ and to reconsider the ‘dollar’s outsize role’: 10 ‘China’s G20 leadership could be the impetus the group needs to initiate this shift […] (it) represents an important opportunity to improve macroeconomic cooperation and launch major reforms of the global monetary system […] Such reform must include a reconsideration of the U.S. dollar’s outsize role in shaping the international monetary system. In an increasingly multipolar world, would it not be more appropriate to build a multicurrency system and make greater use of the only global currency that has ever been created: the IMF’s Special Drawing Rights (SDRs)? Establishing the SDR as the leading global reserve currency would have far-reaching benefits. It would allow all countries – not just major economic powers – to enjoy “seigniorage,” or the profits brought by money creation.’

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‘a general allocation of Special Drawing Rights (SDR)’ could be ‘a source of global liquidity’


Ocampo’s analysis should be given extra weight since he is also the author of an important paper published in 2010 titled ‘Building an SDR-Based Global Reserve System’:11 ‘The second and better path would be to fulfill the aspiration of transforming the Special Drawing Right (SDR) into the dominant global reserve asset, as well as the instrument for funding IMF emergency financing during crisis. This reform can be
complemented with other features: enhancing the use of SDRs, launching a substitution account, and creating regional reserve pools. And, of course, it has to be matched by a more ambitious reform of IMF quotas and governance. The renewed interest in this instrument of international cooperation shown by the G-20 in 2009 makes this reform agenda a viable one.’

The IMF now shares these ideas. At the end of June 2016, president Christine Lagarde wrote a special note to the Board of Governors of the IMF, in which she advised: ‘a general allocation of Special Drawing Rights (SDR)’ could be ‘a source of global liquidity’, during a ‘reform of the international monetary system’.12

In a following IMF-note, prepared to be presented to the most important IMF body, the G20 board,13 we find more details of this new SDR-system.14 It is the first to describe how new SDR-money (M-SDRs) can be issued by commercial ‘parties’ as well, next to the official O-SDRs; ‘Following the recent diagnostic of the international monetary system (IMS), the IMF will explore whether a broader role for the SDR could contribute to its smooth functioning [..] The note sketches some key issues bearing on the role of the SDR in each of three concepts:

- The official SDR, or “O-SDR”, the composite reserve asset issued by the IMF

- SDR-denominated financial market instruments, or “M-SDRs,” which could be both issued and held by any parties;

- The SDR as a unit of account […] for such uses as reporting economic statistics and financial statements, and pricing transactions—examples of the latter include Suez Canal fees and the Montreal Convention on damages, such as lost baggage, incurred by air carriers

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Commercial banks could be used to issue ‘Market-SDRs’



So, according to this idea commercial banks could be used to issue ‘Market-SDRs’, just like they now create money by providing new loans. Epoch Times was the first publication to understand the importance of this IMF note: ‘It echoes Ocampo’s idea of private corporations issuing bonds in SDR and banks making loans in SDR, or a special version of it called M-SDR, presumably standing for “market” based instruments like bonds. The IMF experimented with these M-SDRs in the 1970s and 1980s when banks had SDR 5-7 billion in deposits and
companies had issued SDR 563 million in bonds. A paltry amount, but the concept worked in practice. […]

So after the G20 meeting on July 25, the deputy director of the People’s Bank of China’s (PBOC) International Office Zhou Juan immediately countered the concern about a lack of market demand. He said an international development organization like the Asian Infrastructure and Investment Bank (AIIB) could issue SDR bonds in China as late as August, according to Chinese newspaper Caixin. […]

China insider David Marsh, the founder of finance think tank OMFIF (Official Monetary and Financial Institutions Forum) wrote on Marketwatch in late April about another benefit of launching the M-SDR in China, although he did talk about a wider range of applications rather than just the issuance by the development institution; ‘Beijing’s SDR capital market initiative will allow domestic Chinese investors to subscribe to domestic bond issues with a significant foreign currency component, a
means of helping dampen capital outflows that have gained prominence in the last 18 months as a result of progressive capital liberalization.’

In other words: If Chinese investors can buy bonds or other debt instruments in SDR in China, they could circumvent the capital controls and hold a diversified portfolio of euros, dollars, yen, and pounds with a small amount of renminbi mixed in. And they don’t have to go out of their way smuggling gold across the border to Hong Kong or buying up Italian soccer clubs. China lost $676 billion in capital in 2015
alone and foreign currency reserves are nearing the critical level of $2.7 trillion (now $3.2 trillion), the minimum the IMF thinks the country needs to run the economy. So it’s safe to say the IMF had the same issue in mind when it wrote its paper, whose authors we don’t know. In mid-July it stated: ‘In China, there may be untapped demand among domestic investors for exposure to reserve currencies as capital controls are gradually lifted. From this perspective, M-SDRs issued in the onshore market could potentially reduce demand for foreign currency and reduce capital outflows by allowing domestic market participants to diversify their foreign exchange risk.’

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China is building a platform to expand borrowing and trading in SDRs


James Rickards called this IMF-note in a tweet, ‘a cruise missile at the dollar’. In a recent edition of his newsletter Strategic Intelligence he explained ‘the elite plan’ to kick-start the SDR in more detail:

‘What’s the evidence that the elites are planning to start up the SDR printing press? Here’s an excerpt from an article dated April 25, 2016, by Andrew Sheng, former chairman of the Hong Kong Securities and Futures Commission and a professor at Tsinghua University in Beijing. Sheng’s co-author is Xiao Geng. The article is called “How to Finance Global Reflation”:

An incremental expansion of the SDR’s role in the new global financial architecture, aimed at making the monetary policy transmission mechanism more effective, can be achieved without major disagreement. This is because, conceptually, an increase in SDRs is equivalent to an increase in the global central bank balance sheet (quantitative easing) […] Central banks would expand their balance sheets by investing through the IMF in the form of increased SDRs […] Consider a scenario in which
member central banks increase their SDR allocation in the IMF by, say, $1 trillion. A five-times leverage would enable the IMF to increase either lending to member countries or investments in infrastructure via multilateral development banks by at least $5 trillion. Moreover, multilateral development banks could leverage their equity by borrowing in capital markets…’ This work on SDRs is not merely theoretical. China is building a platform to expand borrowing and trading in SDRs. It will be launched this summer. This is only the second platform of its type in the world. The only existing SDR trading platform today is inside the IMF itself.’

China indeed seems to be planning the creation of a market for SDR-denominated bonds. The government-linked China Development Bank will issue $300 - $800 million SDR denominated notes later in 2016, the first float of SDR-denominated bonds by an individual financial institution. Japan’s three megabanks recently also expressed interest in selling SDR bonds, while other major Chinese banks are planning SDR bond offerings as well. The Chinese government has already said it would open trading of these instruments on the interbank market. All this clearly points to coming changes for the world’s financial system. China’s G20 presidency will present the perfect timing to make them public. In a statement on the official G20 website Chinese central bank Governor Zhou Xiaochuan calls for a:15 ‘broader role of the Special Drawing Rights (SDR) to jointly shape a more stable and orderly international monetary and financial environment.’

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President Xi Jinping hopes to cite a successful SDR bond float

According to news reports: 16 ‘President Xi Jinping hopes to cite a successful SDR bond float as progress toward the yuan’s internationalization when G-20 leaders meet September 4th in Hangzhou, China.’

I would like to end with an interesting side note. One of China’s most senior central bankers, Mr. Min ZHU, who was one of the IMF’s Deputy Managing Directors since 2011 left the IMF at the end of July. Prior to joining the Fund in 2010, Min served as Deputy Governor of the People’s Bank of China. I expect him to return to the PBoC to become the next Governor of the People’s Bank of China. Christine Lagarde seems to be aware of this new position by stating: ‘I will miss Min dearly, both as a friend and a loyal and trusted advisor […] and wish him the very best in the next exciting chapter of his life.’ Willem Middelkoop is the founder of the Commodity Discovery Fund and author of The Big Reset, first published in 2013. In 2007 his first book was published in the Netherlands, titled Als de dollar valt (When the dollar falls).

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