This is some rather significant news announced today — The Chinese renminbi (RMB) was approved by The International Monetary Fund (IMF) for inclusion into the Special Drawing Right (SDR) currency basket, set to occur on October 01, 2016, where it will become the 5th currency to be added.
Managing Director of the IMF, Christine Lagarde had this to say:
From IMF (November 30, 2015):
“The Executive Board’s decision to include the RMB in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system. It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems. The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”
This comes on the heel of several yuan devaluations that occurred earlier this year in August. At the time, there was a lot of buzz surrounding those moves and China’s motives:
From Forbes (August 11, 2015):
China’s latest move to devalue its currency might actually boost its chances to become part of the International Monetary Fund’s basket of currencies later this year.
Tuesday’s announce depreciation of 1.8% means that in trade-weighted terms the yuan is back to the level it was 10 days ago. This wasn’t a huge cut, in other words. Far more important in Tuesday’s deval is the increased role of the market in determining the value of the currency, says Craig Botham, an emerging markets economist with Schroders, a $487 billion money manager based in London.
“We see this more as a reform aimed at Special Drawing Right (SDR) inclusion, rather than at boosting growth,” Botham says.
From Business Insider (August 12, 2015):
In light of that, the PBoC’s devaluation of the yuan could be viewed as an attempt to appear like a more qualified candidate for the SDR.
Notably, the IMF was pleased with the yuan’s devaluation — especially because of the “more market-oriented exchange rate.”
According to a press statement released by the organization on Tuesday:
The new mechanism for determining the central parity of the Renminbi announced by the PBC appears as a welcome step as it should allow market forces to have a greater role in determining the exchange rate. […] Regarding the ongoing review of the IMF’s SDR basket, the announced change has no direct implication for the criteria used in determining the composition of the basket. Nevertheless, a more market-determined exchange rate would facilitate SDR operations in case the Renminbi were included in the currency basket going forward.
The following criteria must be met for inclusion into the SDR:
Looks like the yuan is now ready for the big stage!
At the time of inclusion, the SDR basket will be reconfigured as such:
The yuan will have a 10.92% weighting.
The U.S. dollar will fall from 41.9% to 41.73%.
The euro will fall from 37.4% to 30.93%.
The yen will fall from 9.4% to 8.33%.
Lastly, the pound will fall from 11.3% to 8.09%.
Here are some more thoughts regarding future ramifications of today’s decision:
From SF Gate:
The addition of China’s yuan to the select basket of currencies used as a yardstick by the International Monetary Fund is a sign, experts say, that the yuan may one day become as recognizable as the dollar or euro.
Adding the yuan alongside the dollar, euro, pound and yen is a symbolic victory for Beijing. It reflects the rising importance of the world’s second-largest economy and is an endorsement of gradual Chinese moves toward making the currency freely traded.
Currency traders and economists see the change as encouragement to Beijing to make faster progress on promises to make the yuan “freely tradable” and open its financial system.
Bank of America Merrill Lynch thinks more devaluations will be around the corner:
The bank thinks China will devalue the yuan by 3-4% in the second week of December after the IMF decides on the SDR matter on November 30.
“The RMB could be deceptively stable over the next couple of weeks but reduced intervention and a more flexible fixing would inevitably be associated with a weaker currency – we would potentially look to add to CNH shorts soon after the SDR decision on Nov 30,” wrote Merrill’s currency analysts. The bank sees the yuan to fall to 6.90 by the end of 2016.
Here are today’s numbers:
From Google Finance:
All this talk of SDRs and devaluations can’t help but make me want to re-read Currency Wars by Jim Rickards, which was written way back in 2011 and published in 2012.
In the book, Mr. Rickards argues that we are just at the beginning of a third currency war in the last 100 years. By his accounts, Currency Wars III started in 2010 as a consequence of the financial crisis of 2008. The first salvos were launched by the U.S. with its Quantitive Easing (QE) stimulus programs.
What are Mr. Rickard’s own thoughts about the yuan’s inclusion into the SDR basket today?
Speaking of gold, we all know that the Chinese have an unwavering affinity for the yellow metal… They have for many centuries… so they must be loving today’s low prices!
Most recently, even consumer juggernaut Apple has started to standardized the gold color in its product line:
“Apple has entered into the ‘Golden Age’ of retailing in China and will strike gold in their new dominance against all the other domestic players,” Savio S. Chan, co-author of China’s Super Consumers, said when I asked him about Apple’s new gold fetish. “The two most auspicious colors for the Chinese are red and gold. But it would be a little funny for a successful Chinese man to carry a red iPhone 6, hence gold would be the best color for a high-end smartphone like Apple’s.”
As it pertains to the actual physical metal itself, China is the world’s largest gold producer… and they export NONE of it.
In addition, they are importing it hand over fist.
From Bullion Star:
From Seeking Alpha:
Chinese Shanghai Gold Exchange (SGE) physical metal withdrawals are at an all-time high, having already this year exceeded the full-year total for 2013 – the previous record year.
Furthermore, the amount of gold being taken out of SGE vaults is rising again as we draw nearer to the year-end, with the latest figure for the week ending Nov. 20th at 54 tonnes, bringing the year to that date total to a massive 2,313 tonnes (as compared with the previous record 2013 full-year total of 2,181 tonnes). The year-to-date figure is equivalent to around 80% of current global new mined production on its own.
If gold withdrawals from the SGE continue at the current rate until the year-end, then the annual figure would come out at just under 2,600 tonnes – nearly 20% higher than in the previous 2013 record year.
Some interesting comments from that article…
I have to admit, China’s love obsession with gold only reaffirms my own bullish stance on the future of precious metals.
Now that China’s entry into the SDR is in the fold, can they please FINALLY tell the world the TRUTH regarding their ACTUAL gold holdings?
You can’t tell me anyone actually believes their bogus claims!?!
China’s central bank said on July 17 that it had boosted bullion assets to 53.32 million ounces, or about 1,658 metric tons, from 1,054 tons in 2009, when it last updated the figures. It announced a further increase for July. The U.S. has the biggest reserves at 8,133.5 tons, council data show.
China still has only about 1.6 percent of its foreign reserves in gold, compared with 73 percent for the U.S., 67 percent for Germany and 65 percent in France and Italy, World Gold Council data show.
Regardless, China gained some serious street cred with today’s IMF announcement…