By JC Collins
With the recent announcement of the renminbi BSA’s with Qatar and Canada, and the upcoming G20 Summit in Australia at the end of this week, it is prudent to review some of the available information about alternative measures for IMF reform and a review of the renminbi internationalization process.
The growing number of RMB Bilateral Swap Agreements between the People’s Bank of China and central banks around the world is increasing the internationalization of the yuan. The fact that central banks like the Bank of England and the Bank of Canada are participating in this internationalization is providing us with some extremely valuable information when held in contrast to the reluctance of the US Congress to pass the 2010 IMF Reforms.
Whatever is intended with the political game of brinkmanship by the Republicans in Congress is open to interpretation, but if no agreement or negotiations are concluded on the 2010 Reforms by the end of this year, a course of action by the G20, including the BRICS countries, and the US Administration and Treasury, are being planned and will be implemented whether Congress agrees or not.
In an article from Russia Beyond the Headlines, Russian G20 Sherpa Svetlana Lukash is interviewed by reporters and makes the following statements in regards to the upcoming G20 meeting and the intent of the BRICS countries to propose alternative solutions to the IMF Reforms if the US Congress doesn’t pass the supporting legislation by the end of the year.
“We are expecting Russia, as well as our BRICS partners, to propose serious concrete solutions on how to reach alternative solutions, if the U.S. does not ratify this decision before the end of this year.”
“One of the simplest options is “to untie the decision (over the IMF reform of 2010) into various parts. Since the 2010 resolution is a complex packet of agreements, which includes, among other things, amendments to the IMF charter and a decision to double its capital, and each such decision, according to the IMF rule, requires a certain number of votes for them to become effective.”
“These two decisions can be untied, i.e. this packet can be split into several ones, without an approval of the U.S. Congress but at the administration’s decision. We will break up the packet and start implementing its parts accordingly, so that all agreements come into force.”
From these quotes we can gather that the American Executive Branch, being the Obama administration and the Treasury, are willing to work with the IMF and BRICS countries on fragmenting the 2010 Quota and Governance Reforms into smaller segments which can then be individually implemented by the Obama administration without the approval of Congress.
It also confirms for us that any proclamations from specific researchers and analysts that the BRICS countries seek to overthrow the western or international bankers is nothing but the hogwash we have been saying it is all year. Based on the evidence which continues to build, from world events and the statements of the BRICS countries themselves, the character and analytical abilities of these researchers and analysts should draw serious doubt as they continue to press the story of a BRICS rescue.
In fact, so obvious is the misleading nature of the storyline that the true motives of the individuals promoting it should be seriously questioned.
The urgency in having the IMF reforms implemented is also found in the urgent internationalization of the RMB. The connection between both can be found in the emerging liquidity crisis. The intent of internationalizing the RMB is not to bypass the International Monetary Fund but to embrace it and have the renminbi added to the composition of the SDR basket by next July.
The storyline is already being constructed that no one country or reserve currency, such as the USD, EUR, JPY or GBP, will be able to provide the required liquidity to offset the next financial crisis. This also goes for the RMB as it will be unable to meet this liquidity challenge on its own, which is another reason why the BRICS are not about to overthrow the system.
Only a composition of the currencies, which is found in the SDR basket, can meet the liquidity shortage which is coming. With the RMB added to the SDR basket the IMF can increase global liquidity by issuing SDR denominated bonds. This is the main reason for the internationalization of the renminbi and why central banks around the world are participating in the BSA’s with the PBoC.
So let’s take a closer look at the RMB and understand its internationalization process further.
China’s currency is called both the renminbi and the yuan by media in the western world. The reason for this is easy to understand. Renminbi is the name of the currency and yuan is the unit of measure. Just like the British sterling is the name of the currency and the pound is the unit of measure.
The confusion over this in the western world is found in the way China describes currency numbers. Yuan equates to dollar and dollar is used in the west as both the name of the currency and the unit of measure. So when Chinese amounts are translated into English it is often stated as say one million renminbi yuan, which leads to the confusion over the name of the currency.
Additionally, the RMB is broken into offshore usage and onshore usage. RMB that is traded offshore is known as CNH, and RMB that is traded onshore is known as CNY. Both have different spot rates and yield curves.
The internationalization of the RMB is a part of a broader plan to reform the IMS, or International Monetary System. This reform is intended to reduce the imbalances in the IMS. This imbalance is represented as the accumulation of USD’s by countries around the world, and this accumulation leads to the imbalances with the accumulating countries running serious account surpluses.
The internationalization of the RMB as defined in the increasing number of BSA’s with the central banks around the world can help stimulate and contribute to the reforms of the IMS. As such, the main reasons for the internationalization of the RMB can be stated as:
1. reduce currency risks for both importers and exporters.
2. reduce China’s exposure to USD exchange rate volatility.
3. add RMB to reserve currency list and include in SDR basket.
Based on the above information and the correction of imbalances in the IMS, we can expect that in the coming years China’s rate of USD accumulation will slow and eventually reverse. This will be likely realized when the RMB becomes fully convertible, which may happen sooner than most expect.
Other inevitable outcomes from this internationalization will see a full or partial re-denomination of China’s commodity trade into RMB. The recent bilateral swap agreement with Qatar is very reflective of this re-denomination, as will the eventual BSA with other oil producing nations, such as Saudi Arabia.
It’s important to note that any agreements between China and Saudi Arabia does not mean an end or total collapse to the US dollar. It only means that the RMB is being internationalized and the International Monetary System is being balanced. Any commodity and energy trade between the US and Saudi Arabia will still be denominated in USD.
We are also likely to see commodity derivatives denominated in RMB as well. This will help hedge against commodity price moves and fluctuations in the FX markets.
The BSA’s are all signed for 3 years with some of them already being extended before the date of expiration. These BSA’s will help stabilize RMB liquidity so it can be added into the SDR basket and help stabilize the macro liquidity of SDR bonds. And that is the main reason why these BSA’s are being signed and central banks around the world are re-denominating portions of their foreign reserves into RMB.
The BRICS Development Bank and Contingency Reserve Arrangement which were implemented earlier in the year are not signs of a BRICS overthrow, but are only signs of the development of broader infrastructure meant to support the internationalization of the RMB. This infrastructure is meant to facilitate the clearing of RMB.
CIPS, or China International Payment System is another example of this infrastructure and will be fully operational by 2015. This will ensure global RMB liquidity and help reach the goal of having 6% of global commodities re-denominated in RMB by 2020, or sooner. The 6% could increase dramatically in the event the IMF 2010 Reforms have to be fragmented and implemented individually.
And there we have the strong case for the internationalization of the RMB and the G20 support for the required reforms to the International Monetary Fund. It is the engineered solution to the expanding liquidity problem, with the CSI, or Cultural and Socioeconomic Interception of our mainstream news and some alternative news sources acting as the reaction component of the Hegelian Dialectic.
This week is a focal point of this transition to the Multilateral Financial System as the G20 Summit approaches and the world awaits the US congressional action on the IMF 2010 Reforms. Whatever the outcome is, change is certain, as is the required liquidity crisis. – JC