The Economic Politics of the Yuan-Dollar Peg (Video)
News broke this week that China may soon announce a major increase in its gold reserves in order to convince the IMF that the yuan should be included in the Special Drawing Right basket of currencies.
Jim Rickards, an expert on geoeconomics, believes the yuan’s inclusion in the SDR is inevitable and will go into effect at the beginning of 2016. In an interview on CNBC, Rickards explains the politics behind this move, and why the United States is being pressured to allow it. It comes down to the US wanting to maintain the dollar-yuan currency peg, which Peter Schiff discussed the importance of back in January.
Highlights from the interview:
Rickards: The IMF is positioning to include the Chinese yuan in the SDR bast. The SDR is the Special Drawing Right. That’s just world money that the IMF can print. That’s a very big deal, because the US has blocking power. China says, ‘Hey, if you want us to put up all this money so the IMF can bail out Greece or Ukraine, then we want something in return.’ They want more votes and they want the yuan in the SDR. But the US can block it, so the US is kind of saying to China, ‘Hey, you guys need to be on your best behavior. Keep that peg. Keep that dollar-yuan peg.’
We see China growth slowing down. That’s obvious. Normally, China would weaken the yuan to promote exports. But they’re not doing that now. People who think you’re going to see a weaker yuan might be disappointed, because this is going to play out over the rest of the year. They’re probably going take a formal vote in September, [and] make it effective January 1, 2016. But this is going to condition the yuan-dollar [exchange] rate for the whole year…
CNBC: The IMF, World Bank – Western dominated every since its inception. This is the whole reason that China went barging out onto the world with this whole concept, the AIIB – The Asian Infrastructure Investment Bank. The shock and the horror of the United States when Britain, Australia, and then what? 57 other charter nations decided to jump on the wagon with China, leaving America looking completely naked around the waist… This is politics when it comes to multilateral lending organizations. That’s why China did the AIIB, because of American recalcitrance.
Rickards: That’s exactly right… At the end of the day, China does not want to go their own way. They want to be in the club. They are the second largest economy in the world, but still technically an emerging market. They want to be in the big guys club with the rest of the G7, and the even more exclusive club of members of the SDR…
The US has been standing in their way. China says, ‘Look, we’re going to set up a parallel system. The AIIB, the BRICS development bank. We’re going to do bi-lateral deals with the yuan and Brazil… We’re going to make the yuan more and more convertible… Let us into your club, but if you don’t, we’ll start our own club.’ The US is starting to get that message… I do look for the yuan to be included, effective January 1st. This is a way for China to be a reserve currency without opening their capital account, because they still like a closed capital account to some extent.
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