A smallish article was hidden on page 3 of the US print edition of the Financial Times today. It was called, “China eases limits on oversease funding as forex reserves fall. This innocuous article actually describes a policy change by the Chinese authorities that, if it is sustained, provides yet another move toward the necessary global freedom the reminbi, or yaun, requires if it is to be adopted by the IMF as a reserve currency.
In August I blogged about what China was doing to prepare the way for its currency to become a reserve currency (see The Coming Yuan and the Falling Dollar). This new policy allows Chinese firms tonow raise funds overseas, and only have to register with the authorities the transaction. Previously firms had to obtain permission. This will make it easier for Chinese firms to issue offshore bonds. It may take time for this policy to become known and widely used, but its a good sign. It will also increase the flow of capital into China, and increase the amount of Chinese debt held overseas.
The IMF published a press release August 19th (see IMF Executive Board Approves Extension of Current SDR Currency Basket Until September 30, 2016) confirming that they would not be changing the basket of currencies comprising the reserve currency SDR. The Special Drawing Rights (SDR) is the IMF currency in which all members deposit funds (exchanged with their local currency) with the IMF in order to use for later emergencies, should the need arrise. Chine is keen to see the renminbi accepted as one of the currencies in the basket. This would be a pre-condition for it to eventually replace the dollar as the worlds reserve currency.
Out of interest, the SDR has an interesting past. Up until the famous Bretton Woods agreement, John Maynard Keynes had been a keen proponent of a new currency to act as the global reserve currency (since gold was finally off the table). Keynes had come up with all manner of names for this exchange-based currency; he knew American would not accept sterling and Keynes wanted to avoid the dollar being the standard. The Americans, in the body of Harry White (at Bretton Woods), would have none of this. The dollar it was going to be. Keynes of course lost the debate, but eventually won the moral victory. The dollar did replace sterling as the world’s reserve currency, but the newly minted IMF needed an independent, neutral currency in order to manage the various exchanges between currencies. So Keynes ideas was eventually adopted by the IMF, long after his death. It was never quite implemented in the way he envisaged, but implemented it was. See my book reviews of The Summit: Bretton Woods, 1944, by ED Conway, Pegasus Books, 2014 and The Battle of Bretton Woods, by Benn Steil, Princeton, 2013.