WHEN WILL CHINA END THE DOLLAR PEG
MARCH 25, 2015
The Last Year of American Hegemony By JC Collins
One of the biggest questions which we need to consider as the world moves closer to the full implementation of the multilateral financial system is when will the RMB end its managed peg to the USD?
Now that the official request has been made to the International Monetary Fund, for the yuan to be included into the SDR basket composition, it is only a matter of time before the ending of the peg occurs.
There are a few time frames we are working with. One is the May meeting of the IMF where the first formal discussions around the new SDR composition will take place.
The second is in October, which is when the new composition will be confirmed. Finally, the new basket will come into effect on January 1, 2016.
There are some key indicators and trends which we can use to build a case for the time frame of this event(s).
The official IMF transcript of a speech Christine Lagarde gave in China yesterday will offer us our first clues. The excerpts below are from that speech, followed by my interpretations.
“The implementation of structural reforms as outlined in the 3rd Plenum Blueprint is underway. This should lead to slower, safer, and more sustainable growth–with a focus on innovation and entrepreneurship–which will be good for China and its people – and good for the world.”
The market and financial reforms from China’s Third Plenum detailed back in 2013 have been discussed across many platforms. The consensus is that the financial reform component of the Plenum, which included the mechanism for exchange rate adjustments, was a reference to the widening of the exchange rate band with the USD that took place last year.
It is my contention that this segment of the Plenum is referring to a larger move in the exchange rate mechanism, as would be necessary for the RMB to be included in the SDR basket.
Having the yuan remain pegged to the dollar would be pointless in the SDR framework, as it would not offer broader stability, which is the point of the inclusion in the first place.
“I noted the impressive efforts made by the Chinese government to reform in three key areas in particular: cleaning up the house, by promoting good governance through strengthening the legal framework and the anti-corruption campaign; cleaning up the air, by curbing pollution and preserving the environment; and clearing the path to even more engagement with the world, through China’s further participation in the multilateral dialogue and through more international investment and trade.
I welcomed China’s various initiatives in this area, including through the newly established Asian Infrastructure Investment Bank (AIIB).”
This statement was thoroughly discussed in the previous post titled The Coming Western Tribunals. The references made in that post to historical sovereign bond debts and environmental cleanup, as well as anti-corruption, is validated with this statement from the IMF.
“I am very impressed by the rapid internationalization of Renminbi (RMB) in recent years. The authorities’ commitment to accelerate reforms, particularly in the financial and external sectors, should further facilitate the international use of the RMB.
The authorities have also expressed interest in having the RMB included in the SDR basket. We welcome and share this objective, and we will work closely with the Chinese authorities in this regard.”
This statement confirms the information which was provided last year in the post titled Renminbi is Already A Defacto Reserve Currency.
“During our meetings, we also discussed the delays in implementing the IMF’s 2010 quota and governance reform. I share the authorities’ view that every effort should continue to be undertaken to ensure that these reforms can be made effective as soon as possible.”
This was previously reviewed in the post Renminbi and the Alternative IMF Reforms.
The trend of information which we have been following for the last 15 months is now being validating almost daily as the official announcements and events play out as expected.
It is rudimentary to suggest that the country with the largest economy on Earth can not keep its currency pegged to that of another. The price discovery which will take place in the opening days of the pegs end will see appreciations of the RMB.
Some of the benefits of this upward valuation will be realized as foreign funds are encouraged to enter China, there will be lower Chinese company operating costs, in the form of cheaper imports, and the Chinese will be able to purchase foreign assets cheaper.
The appreciation of the yuan will also slow economic growth within China, which is also something mentioned above by Lagarde in her speech. This was also reviewed in the post The Redback Revolution.
To determine the timing of this event(s) we need to consider what other factors and systemic implementations align with the months of May and October.
First, there is the China International Payment System, or CIPS, which was originally scheduled to be operational in 2014, but was delayed due to technical difficulties.
(This technical difficulty may have something to do with the missing Malaysian plane last year, which had 20 employees from the computer processor manufacture Freescale Semiconductor.
A spokesman for the company said the employees, who were traveling to China, were very important employees of the company who worked on processor technology.
There is little additional information available, but the timing of the planes disappearance with the original start date of CIPS, is highly questionable. See post The Algorithmic Central Bankers for additional information.)
It is now stated that the CIPS system is ready to go, and is only going through final testing with 20 banking institutions, 13 of which are Chinese, and the remainder as foreign subsidiary banks. The new operational start date is in October, but it could be fully operational at any time.
This October time frame corresponds with the next fiscal crisis in America where the debt ceiling is reached and the Treasury runs out of money to fund the government.
This could create an excellent pretext for the Chinese to end the peg. When a similar situation happened in October of 2013, the Chinese were very outspoken on the volatility in the USD.
Comments may be made at the end of Part 2 Thank You