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SDR does not stand for “Secret Dollar Replacement” - BBH

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Apr 18, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Research Team at BBH, notes that at the IMF/World Bank meetings last week, Chinese officials are again pushing for greater use of the IMF's unit of account, Special Drawing Rights.

    Key Quotes

    “China, like several other countries, is critical of what they perceive to be a unipolar world dominated by the US. Numerous books in recent year claim the US is already in decline, or that the world is experiencing hegemonic stability crisis because it is a "G-Zero world. China is rising power, and it presses demands for accommodation territorially as in the South China Sea but also in economic and financial matters.

    Contrary to some pundits claiming that the Chinese yuan is challenging the dollar, Chinese officials, led by the central bank, have been advocating the use of the SDR to supplement and supplant the central role provided by the US dollar. Most of the talk seems to have a propaganda value rather than a real impact.

    The true internationalization of the yuan, which means that trade and capital flows with its Special Administrative Region (Hong Kong) ought to be considered domestic, is considerably less than the other currencies in the SDR. This is why many economists were critical of the decision to include the yuan in the SDR.

    China has suggested two initiatives this week. First, China suggests it may issue SDR bonds domestically. China has also indicated it will begin publishing its reserve data in terms of SDR.

    What about foreign investors buying SDR bonds? They could if they wanted, but we suspect the investor interest would be limited. China is also engaged in a bit of misdirection. By talking about the SDR, China deflects attention from the more immediately pressing issue. The IMF is pressing China to provide more information about the central bank's use of derivatives, such as forward and futures to intervene in the foreign exchange market. These are old ploys that central banks have used to conceal their operation. Intervening in the forward or future market would not show up in the current reserve figures.

    Money, economists argue, has three functions. It is a store of value. It is a unit of account. It is a means of exchange. The SDR is not money in this sense. It is a unit of account. It is not a store of value. If one does not think that fiat currencies are sustainable over time, the SDR is a basket of fiat currencies. Its value is purely a function of the performance of its composite currencies. It is not a means of exchange. Individuals and institutions do not price their goods in SDRs. One cannot pay taxes in SDRs.

    Ultimately, Chinese officials seem to misunderstand the nature of the SDR or seem to for mostly propaganda purposes to criticize the role of the dollar in the world economy. For its part, the IMF need not dismiss out of hand Chinese suggestions, but their reform effects are better focused elsewhere, including GDP-linked bonds, which some of the folks who codified the so-called Washington Consensus have advocated.”
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