5 Things to Know About China & IMF

5 things to know about China and SDR's

5 Things to Know About China & IMF

China was seeking IMF approval to be part of the Special Drawing Rights at the last IMF meeting.  Prior to the upcoming IMF’s meeting in Lima, Peru in October 2016 the IMF agreed China could re-approach the discussion in October 2016. Instead, yesterday IMF Approves China Inclusion in SDR (You can read more about the SDR here.)

For some background, read my blog from October’s IMF meeting.  Here’s a good piece from the WSJ about China’s inclusion into the SDR. In anticipation of approval and continuing since October, China’s Foreign Exchange Reserves Dwindle.   

5 Things To Know about IMF & China

  • China Clearly meets the criteria on global trade: @13% of global GDP and 13% of currency transactions.
  • Currently, they don’t have a freely tradeable currency that is widely used. While China has a widely used currency as of today it is still subject to capital account restrictions.
  • Have a liquid capital market (bond market statistics and plans for issuance are here
  • A Central Bank balance sheet must be able to provide instant liquidity when needed
  • A Central Bank’s balance sheet also needs to have an amount of gold, which is designated by the IMF and scaled to the size of the countries economy.  Goldman Sachs did a great piece on China’s Gold Holdings which you can read here.
  • In addition to gold & currency, reserve status is typically conferred to countries with active bond markets in their home currency as well as the currency of their trading partners.
    • China is planning at least 1 trillion yuan ($161 billion) in bonds, and potentially a multiple of that, to fund construction projects that can help address a struggling economy, according to people familiar with the matter.
    • You can read more detail an article out of Reuters on China’s bond issuance here and here. 

Disclosure of Gold Deposits

China hadn’t formally disclosed their gold reserves (see China’s Gold Reserves data here<) but they clearly had more than enough gold to meet the IMF requirements this year and continue to accumulate.

Gold Reserves are country’s gold assets held by the central bank. They are intended to be used to pay off depositors in times of crisis. as paper money became more prevalent and accepted as “legal tender”, a countries gold reserves became more important operationally as the currency was no longer backed by the metal. World Official Gold Statistics as of February 2015, published by the World Gold Council can be found here.

The Trans-Pacific Partnership (TPP)

The Trans-Pacific Partnership (TPP) and the 12 countries included met on October 4, 2015, Ministers of the 12 TransPacific Partnership(TPP) countries:

  • Australia
  • Brunei
  • Darussalam
  • Canada
  • Chile
  • Japan
  • Malaysia
  • Mexico
  • New Zealand
  • Peru
  • Singapore
  • The United States
  • Vietnam

You can read more about the TPP and familiarize yourself with this trade group using the following resources:

The Globe and Mail put out this snapshot of what the TPP is and its mandate.

Another strong explanation for their plans is on their home page and can be read here. 

Quite a few moving parts! I think IMF’s announcement now will help firms prepare themselves and China can prepare itself for a completely open currency market, greater bond issuance, etc.

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IMF SDRs AND CHINA