A New Global Financial Order

Economics, Premium POM

By JC Collins

Back at the beginning of 2014 when I first mentioned the idea of the SDR being used as an alternative international reserve asset to the US dollar many found the thesis to be absurd and unrealistic.  It was said that the SDR was a dud from decades past and could never be used to facilitate a restructuring of the financial framework.  Besides, China was going to overthrow the US dollar and lead the world into a new golden age of precious metal awareness.  Now, two and a half years later, it has become accepted fact that the Special Drawing Right of the International Monetary Fund is ascending to its pre-ordained status at the apex of the world’s monetary pyramid.

Still, there are certain characters that make a good living continuing to entertain a specific demographic while promoting the death of the USD and the collapse of the world’s economic system.  It’s like a continuous splurge of slop which is shaken, stirred, rinsed and repeated with outrageous click generating headlines and unsubstantiated supporting evidence.  Facts such as the Chinese renminbi being added to the SDR, and the PBoC issuing SDR denominated bonds, are completely ignored, as are interest rate increases and the actual structural changes which are taking place around the world.

Entertainment value aside, things continue to progress on the transition itself and 2016 is still shaping up to provide some dramatic and fascinating adjustments to exchange rate regiments and monetary rebalancing.

Since first pushing the SDR alternative back in 2009 after the financial crisis, Zhou Xiaochuan has continued to champion its super-sovereign reserve asset potential.  International institutions and central banks soon began discussing the SDR and publishing working papers on the fundamentals of this transition and evolution of the worlds’ monetary framework.

Here on POM we have covered so many in-depth and complex segments of this transition that I myself forget at times.  From sovereign debt restructuring to the use of substitution accounts, and the progression from national currency’s to regional and super-sovereign assets, the breadth and width of this transformation is daunting.  It truly takes a complete review of all the material presented here and even elsewhere, to get only a marginal grasp on the fullness of what is coming.

The consolidation of global governance is no more prominent than on the monetary and financial fronts.  Alongside religious, political, and cultural consolidations, the monetary and financial mandates of the multilateral transition are fast becoming reality.

The alignment between all nations and institutions is happening with a certain sense of urgency.  There is no doubt that this urgency is born from the threat of economic volatility, which is played on by the promotors of constant collapse.  And yet, there is a sense of purpose and direction which has been injected into this international transformation.

Reader Mark provided a link to information about China implementing an SDR-based borrowing platform this summer.  The article is clear, to the point, and confirms much of the material provided here on POM over the last 2 to 3 years.

From the article:

China appears likely to speed up promotion of the International Monetary Fund’s special drawing right under a plan to establish a platform this summer for SDR borrowing by Chinese and foreign entities on China’s onshore capital market.

The initiative will help fulfil several strategic Beijing monetary and economic objectives. These include boosting international acceptance of the yuan , which enters the IMF’s composite currency unit in October with a weighting of around 10.9%, joining the dollar, euro, yen and sterling as officially recognized reserve currencies.

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.

The SDR borrowing platform seems likely to be set up as early as July, earlier than expected, in advance of the Chinese currency’s formal SDR adherence. This will necessitate creating a synthetic SDR that can be related, through forward pricing, to the “new” SDR being created on Oct. 1. This step could lead the IMF to update its procedures for fixing the SDR, which at present is set daily, but in future may need to be established on a 24-hours-a-day basis.

China is open to extending further the number of currencies in the SDR basket. It would favor, for example, the rupee joining in coming years in line with India’s desire to internationalize its currency, but China stresses this should take place only if driven by capital market requirements.

The Chinese SDR initiative, depending on the market response, could eventually allow the SDR to become a currency in its own right, rather than an artificial, narrowly used aggregation of leading currencies. But this is a long journey that faces many hurdles and may never be completed.

Foreign sovereign issuance of yuan bonds is at a very preliminary stage. The U.K. government raised 3 billion yuan in an offshore bond in October 2014. South Korea issued a 3 billion yuan domestic Chinese “panda” bond in December 2015, a pioneering action that could pave the way for further such transactions in both SDRs and yuan.

If Chinese resident investors become keen purchasers of SDR-denominated bonds, as well as domestic yuan bonds by foreign borrowers, this would contribute to improving the health of China’s international balance sheet.

Chinese officials have long backed shifting China’s net foreign assets (the difference between external claims and liabilities of China’s combined public and private sectors) towards foreign holdings by non-public sector investors. Furthermore, officials would welcome denominating some of these claims in yuan rather than in foreign currencies led by the dollar.

Bringing the Chinese currency into the SDR, in a long-term move trailed by Chinese officials to produce a new “super-sovereign reserve currency,” was accomplished last November, after a short, decisive Beijing campaign to win acceptance.

The decision marks the latest stage in a long Chinese effort to lower the dollar’s international monetary dominance.Yet the U.S. Treasury joined the other international representatives on the IMF executive board in unanimously approving the yuan’s inclusion. The U.S. believes that, by obliging Beijing to open up its capital markets and other parts of the economy as a quid pro quo for the yuan upgrading, the West has won a worthwhile prize in accelerating China’s international economic integration.

Zhou Xiaochuan, governor of the People’s Bank of China, has been the public face of Beijing’s SDR campaign. He said at in Paris at the end of March that China intended issuing domestically orientated SDR-denominated bonds to promote the composite currency’s use. Up to now, however, the start date has been uncertain.

This should dispel any further debate about which direction the international monetary framework is moving.  The alignment between both China and the United States on these matters is hard to ignore.  Though there is some independent positioning and strategic planning which causes temporary delays and friction, the path forward is clear.

A new global financial order is emerging which is based on the order which has been.  This new order is not materializing in a vacuum, but is the natural evolution of what was.  All things are in a state of transformation – including the system which is only now emerging.  – JC