Russia announced on June 10 that it will purchase US$10 billion of the new
SDR-denominated International Monetary Fund bonds. It also announced that it
will further diversify its $140 billion of US dollar holdings. Brazil will also
buy $10 billion worth of the new bonds, and China will buy $50 billion of the
new bonds. India will likely announce its own purchases very soon.
These are merely the opening moves by the BRIC (Brazil, Russia, India, China)
countries, leaders of the emerging market economies of the world. Their summit
on Tuesday in the central Russian city of Yekaterinburg, scene of the July 1918
execution of Tsar Nicholas II and his family, may prove to be a milestone in
efforts to engineer the architecture of a new global order spanning financial,
economic, trade, and monetary matters.
The new IMF bonds are denominated in the synthetic Special Drawing Rights (SDR)
currency, which represents a basket of currencies. In effect, the purchaser
enjoys enhanced insulation from currency risks associated with the US dollar.
In addition, the purchaser spends US dollars to buy the new bonds, thus
furthering his goal of divesting of dollars. There are also political
motivations for the announced purchases - no doubt the BRIC countries are
seeking to drive home to global investors the fact that the emerging economies
are fundamentally healthy, able to provide funding in the midst of this
terrible global crisis for aid to economies in the emerging markets that are
struggling, and thus they (BRIC) are an attractive place for continued
investment flows.
Also, BRIC members are making a potent bid for a much greater voice in
international organizations and institutions such as the IMF, the World Bank
and so forth. The old status quo where the US and Europe dominated the global
order and its key institutions is rapidly changing as the emerging economies
take up key positions in the global economy, international finance and trade.
BRIC members are ensuring that their leverage against the US and Europe is
enhanced within such institutions just when deliberations over how to transform
the present order begin to heat up. This is a pragmatic and forward-looking
move on their part. As the primary global lenders, they see a real opportunity
to leverage their strengths against US and European weaknesses to achieve key
concessions that have to do with moving the present global order along the path
of transformation to something new.
The present US administration may well be unwilling and unable to risk
alienating and angering BRIC members as deliberations proceed, for fear of
losing crucial lending. Such negotiations and deliberations are going to be
very tough for the US side. Thus, BRIC is rapidly moving into a strong
negotiating position with respect to the US and Europe, and its members
cleverly seek to consolidate their positions in key institutions and
organizations.
Whether SDR-denominated bonds ever takes the place of the US dollar as the
international reserve currency is a matter for the future. Such a replacement
for the dollar is only one proposal of several on the table in international
deliberations over what a new order should look like. But these new bonds don't
have to become an international replacement for the dollar in order to serve a
key purpose, that of helping to facilitate the increasingly resolute policies
of central banks to employ multiple mechanisms to decrease their exposure to
the US dollar, sooner rather than later, but doing so in an orderly fashion
without risking a dollar panic.
Converting dollars into hard assets
China's compelling new policy of converting ever-greater sums of dollars into
hard assets is now accelerating as it stockpiles an ever wider array of
resources and commodities and buys up equities in resources-oriented companies
around the globe. The recent defeat suffered by Chinalco in attempting to
acquire stakes in Rio Tinto is not deterring China from continuing to pursue a
raft of smaller, lower-profile but key outbound acquisitions around the globe.
China's stockpiling of resources, its loans to resources-based companies, its
outbound acquisitions and its funding of crucial energy projects and pipelines
all afford it and its partners multiple important advantages presently and
going forward.
China's trade ties and trade volumes with the resources-oriented
under-developed economies of the world are being widened, deepened and boosted.
China-Brazil trade is but one key example. China has now eclipsed the US as
Brazil's biggest trade partner.
Deeply important political/geopolitical advantages accrue to China (and
generally to the emerging market nations as a whole) from the bolstering of
trade ties noted above. These political/geopolitical advantages reinforce
China's growing global leverage against the developed West in many key spheres
by helping to advance the political and economic consolidation of the
under-developed, resources-oriented nations more in line with China's position
and its world view.
Especially is that so when one considers the fact that China, in the gross
absence of leadership by the developed economies as the traditional drivers of
global demand and growth, is emerging as a key financial/economic driver for a
return to global economic growth, as the IMF is now predicting. Against the
backdrop of the intensifying international debate and deliberations over how to
reform and transform the old US-centric global order, these growing
political/geopolitical advantages do indeed enhance China's position and
leverage and those of its partners.
China and the under-developed, resources-oriented economies are consolidating
their control of strategic resources of all kinds during this crisis. As global
growth returns, their collective leverage over production and pricing will only
turn out to be greatly enhanced, as will their geopolitical clout as a direct
result. This, of course, bodes ill for the developed economies of the world as
respects their once-dominant global leverage, since they are profoundly
dependent upon imports of all such resources from the under-developed nations
of the world.
China's central bank enjoys the advantage of steadily decreasing its exposure
to the dollar as it accelerates its conversion of dollars into hard assets.
China also reduces its reliance upon the dollar in trade to the extent that its
bilateral trade with its partners comes to be conducted in currencies other
than the dollar and to the extent that its loans to its trade partners become
denominated in something other than dollars. As these mechanisms come to be
employed to a greater extent then China's forex reserves will naturally take on
a much more diversified complexion, reducing the role of the dollar component.
China's accelerating policy of converting dollars into hard assets plays into
its larger strategy of decoupling in a very potent way. The decoupling strategy
is dealt with in detail later in this article.
In view of the foregoing, no objective observer can any longer conclude that
China's leaders or those of its partner nations are "all talk". No indeed, for
they are prudently and intelligently beginning to put their money where their
mouth is.
Panda bonds
One of the most interesting proposals put forward on the subject of paving the
way for greater use of other (non-dollar) currencies in international finance
is that of issuing so-called panda bonds. On a June 7 visit to the US, Guo
Shuqing, the chairman of state-owned China Construction Bank (CCB) and former
head of the State Administration of Foreign Exchange suggested that the US
government and the World Bank consider the possibility of issuing renminbi
(also referred to as yuan) bonds in the Hong Kong market and the Shanghai
market.
The bond issues could be relatively small to begin with - perhaps 1 billion to
3 billion yuan (US$142 million - $436 million). Exactly what is a panda bond
and how would they work? What would be the advantages and disadvantages? How
might such a mechanism affect the dollar and US Treasuries?
Fundamentally, an issuer of any bond does so in the interest of borrowing money
from global lenders, whether such lenders may be individual investors, bond or
other fund entities, central banks or perhaps a combination of some/all of the
above. Bonds are denominated in a particular currency. That means they are
purchased in that currency and they are redeemed in that same currency.
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