Doing Their Homework

Is China getting a gold star?

Photo: Kristine Kisky. Source: Morguefile

When I was a little boy, my teachers would sometimes put a gold star on top of my homework. It wasn’t’ a grade, but it meant that I had done a good job.

That’s sort of what happened with China and the International Monetary Fund. The IMF decided to include China’s currency in its basket currencies, the SDR. SDRs aren’t a currency, they’re a claim on reserves held by the IMF. Member countries have to deposit some of their own currency at the IMF. In exchange, they’re granted a certain number of SDRs. They can exchange these for the basket currencies, if they want to.

As such, they’re a form of credit for small countries that may want access to hard currency reserves. They were created in 1969 as an alternative to gold in the Bretton Woods monetary system. So for the IMF to change its SDR basket to include China in its SDR basket is a form of recognition that China’s currency is now considered a major medium of exchange.

SDR weights before and after inclusion of the RMB. Source: IMF

On the one hand, the IMF’s decision is a vote of confidence for China. They’ve been liberalizing their capital markets, reforming their banking system, and expanding their role in global trade. China has a $10 trillion economy—13% of the world. Inclusion in the SDR is largely symbolic, but China’s leaders care a lot about symbolism.

But on the other hand, it’s patronizing. China shouldn’t have to ask politely to move up from the kiddie table at the Thanksgiving meal. They’ve earned the right to be treated as a major economic power. It’s impossible to ignore them when considering global economic issues. Last year China’s economy grew by over $700 billion. That’s more than Switzerland’s entire GDP.

Source: World Bank

So if there’s a report card on how countries are doing, it’s written by the marketplace, not some arbitrary, unaccountable board of dignitaries. The US Dollar accounts for 60% of official global currency reserves. Investors hold dollars because their markets are deep and liquid. Symbols are important—but only if the symbol represents something real.

Douglas Tengdin, CFA

Charter Trust Company

By | 2017-07-17T12:22:19+00:00 December 3rd, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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