By Rich Checkan
Christine Lagarde, Managing Director for the International Monetary Fund (IMF), recently made a historic announcement. In the assessment of the IMF, the Chinese government had taken the proper steps to prepare the Chinese yuan for inclusion in the IMF’s Special Drawing Rights (SDRs) basket of currencies.
As a result, effective October 1, 2016, the yuan will join the U.S. dollar, euro, British pound and Japanese yen as exclusive members of this group of internationally accepted and economically important currencies.
The two hurdles the Chinese government needed to clear to achieve this status were…
- China needed to be a major exporter. Done… long ago.
- The Chinese yuan needed to be freely tradable. This hurdle was a bit tougher to clear, but significant reforms were enacted, and more reforms will follow.
China is the world’s second largest economy. So, as we have written several times over the past year, the yuan’s inclusion in the SDR basket was never a question of “if.” Rather, it was a question of “when.”
Ms. Lagarde provided the answer.
Here’s what the current SDR basket composition looks like compared to how it will appear next October…
As you can see, not only was the yuan added to the basket, but, it was also given a place of prominence as the third largest currency holding in the basket… ahead of the British pound and Japanese yen.
Most of the ‘room’ made available for the yuan’s inclusion in the SDR basket came from the euro in absolute terms. However, by percentage, the British pound gave up the most ground. The pound moved from third out of four currencies in the allocation to fifth out of five.
On the other hand, the U.S. dollar gave up virtually nothing in absolute or percent allocation terms.
Actually, not much really changes initially.
You see, while this is important from a symbolic standpoint, it does little to change the way global business is currently being conducted. The dollar remains the world’s pre-eminent reserve currency.
However, China has taken a huge step toward eventually challenging that status.
Day-to-day though, it will be business as usual. China will continue, as it has for some time now, to do all the right things to emerge as a dominant global economic power…
- They have established bilateral trade agreements with key trading partners.
- They have recently established the Asian Infrastructure Investment Bank as a direct rival to the World Bank.
- They have increased foreign lending.
- They have established emergency credit facilities for foreign governments.
- They have relaxed the barriers to the yuan for both institutions and for individuals.
- They have purchased raw materials and the means to produce them at an alarming rate.
- They have significantly increased their holdings of Central Bank gold, and they show no signs of stopping.
What could go wrong?
From China’s perspective, the concern is simple.
With increased access and freer two-way markets, the Chinese yuan is no longer completely under the direct control of the centralized Chinese government. Volatility becomes a concern. Stability in the Chinese economy becomes at risk.
From the United States’ standpoint, the concern is obvious.
The fox is in the hen house. With the yuan a part of the SDR basket, and as China continues to do all the right things to become a dominant financial power, the writing is on the wall. Although other currencies gave up ground to include the yuan, in the future, most expect any increases in yuan allocations will fall squarely upon the shoulders of the U.S. dollar… diminishing its role in the world over time.
My mind wanders to that famous quote (believed to be attributed to Johnny Hart and Brant Parker, creators of the comic strip, The Wizard of Id)…
He who has the gold makes the rules.
Follow China’s lead. Use the dollar’s current strength to diversify into gold and other real, tangible assets. You may not own enough in the end to make the rules, but you most certainly should be able to control a good deal more of your destiny… regardless of which currency reigns supreme at the time.
Rich Checkan is CEO of Asset Strategies International, leading specialists in using precious metals to diversify your portfolio and secure your asset base. To read more from Rich and his team, and for a free consultation regarding your current requirements, enroll as a Q Wealth Member here now.