The U.S. Needs to Recognize China's Currency Aspirations in the Latest IMF Review

NEW YORK (TheStreet) -- There's an important opportunity this year to rework the global currency system, and the U.S. must make sure it takes part in the related discussions.

Ousmène Mandeng, a senior fellow at the Reinventing Bretton Woods Committee, lays out this opportunity in a recent article in the Financial Times.

Here's what's happening. This year the International Monetary Fund this year is reviewing special drawing rights, which are foreign exchange reserves held by the IMF. Their value is based on a basket of four currencies: the dollar, the pound, the euro and the yen.

As Mandeng points out, countries can exchange SDRs for usable currencies to supplement their international reserve holdings.

The IMF reviews the composition of the basket of currencies every five years. What's important this time around is that there's a chance the Chinese currency, the renminbi (or yuan), gets added to the basket. Mandeng writes that the review this year can be more than just a perfunctory assessment of what should be included in the basket of currencies. He argues that this review provides the world with a chance to change the international monetary system.

SDRs were created in the 1970s in an attempt to provide greater liquidity to central banks in a world dominated by the greenback. The SDRs originally included 16 currencies.

The dollar achieved its dominant position after the World War II, a dominance that was codified at the Bretton Woods Conference, which defined the structure of international finance for the postwar world.

This dominance has been maintained up until now and allowed the U.S. to support its economy through a decline in the value of the dollar up until early 2014.

From time to time, various attempts have been made to make SDRs a rival to the dollar, but, as Mandeng notes, all these efforts have flopped.

What is different now, he adds, is that "Interest in the SDR has shifted significantly in large part due to China."

The tone of the review is different, Mandeng writes, because, "SDR valuation reviews are normally rather technical affairs. This time though, the introduction of additional currencies is firmly on the table. China has taken big steps to lobby for the inclusion of the renminbi."

Mandeng suggests that new SDR currencies should not be limited to the yuan, however. He says major emerging-market currencies, as well as the Canadian and Australian dollars, could also qualify.

With its 16 original currencies, the SDRs aimed at inclusiveness. With the incredible increase in global trade and the relatively free flow of capital throughout the world, shouldn't the role of SDRs be examined again along with the structure of international financial arrangements around the world?

There is still much to be said and debated about the future role of SDRs and what should and should not be included in the reserve currencies of the world.

This opportunity seems to be too good to miss. U.S. officials may be a little uncomfortable with this discussion because it puts into question the dominant role of the dollar in world finance. Sooner or later, however, the U.S. is going to have to accept the fact that things are different now.

The U.S. lost out because it opted out of the creation of the Asian Infrastructure Investment Bank. It can't continue to avoid the developing currents in the world just because its uncomfortable with the way the world is changing.

U.S. officials need to be fully involved in the discussions arising out of the IMF's review of the composition of the SDRs and the future role of the SDRs in the world financial system.

 

 

  This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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