The China Multilateral Directive

Economics, Premium POM

How RMB Internationalization and the SDR Strategy Have Merged

By JC Collins

For so long many promoted the idea that the internationalization of the Chinese renminbi was following a different strategy to that of the international banking and financial mandates brought forth from the International Monetary fund and the Bank for International Settlements.  Most of these pronouncements are now ignored and have been rendered obsolete by the multilateral events of 2015.

When so many were predicting that China was going to dethrone the US dollar as the world’s primary reserve currency it was only here on POM that a factual and realistic analysis was provided.  This analysis concluded that the renminbi would in fact be added to the Special Drawing Right composition and also correctly concluded that China had no intentions of replacing the dollar, but only to join the dollar in the common goal of working towards rebalancing the international monetary system.

Such a task is not without volatility and there has been, and continues to be, much geopolitical and socioeconomic positioning taking place.  The reluctance of the US power base to relinquish influence over large swaths of the world has created a unique situation where most countries have to agree on workarounds to monetary reforms while still maintaining a level of ongoing conciliation with the United States.

The on-going delays over the IMF 2010 Quota and Governance Reforms is an example of this play on positioning and strategy.  The overall objective is to re-balance the international monetary system but how we get there is being continuously negotiated.

In the meantime, the rest of the world is not waiting for the US to make decisions and are pushing forward with multilateral solutions.  This was easily predicted and determined almost two years ago when the framework for alternative and parallel institutions began to be designed and promoted.

On March 29, 2014, in the article The Bear and the Dragon, I stated the following:

“Any attempt to bypass the dollar based economic system without US participation would require the following components:

  1. Creation of a development bank outside of the World Bank structure.
  2. A way to balance trade settlement outside of the SWIFT payment system.
  3. Advanced diversification away from US dollar denominated reserves.
  4. The multilateral G20 will have to become more influential than the US controlled G7.

Though many analysts in the western world theorize that we are at least a decade away from the level of workarounds that would be required to remove dollar dominance, I propose that we are much further along this process than most would care to realize.”

We can determine now, almost two years later, that my analysis was extremely accurate.  The implementation of both the BRICS New Development Bank and Asian Infrastructure Investment Bank are two development banks which are operating outside of the World Bank structure.  It is important to note that both institutions have openly expressed their desire to work with the existing World Bank, and most US allies have signed on as members.

The second point has also been addressed with the China International Payments System, or CIPS, which is now in operation.

The third point has also been taking place as more central banks begin to accumulate additional renminbi denominated assets.  This will pick up pace in 2016.

The fourth point is also extremely relevant as there is a movement within the G20 to bypass the American delays and implement monetary reforms sooner rather than later.  The fact that China holds the G20 chair for 2016 only re-enforces what is being communicated here.

There is much more to come in the early months of 2016.  What is undeniable now is that the internationalization of the renminbi is moving towards completing a larger and longer process of re-balancing the international monetary system through the rise of the SDR as a multilateral reserve asset.

All things are beginning to align.  – JC