As we count down to the end of 2014, today’s Markets and Money takes a peek into next year. That’s because one component of the world monetary system is due to reset. By next Christmas, we’ll know one way or another. Place your bets now.
The question is whether the International Monetary Fund (IMF) will include the Chinese currency, the yuan, in its basket of reserve currencies.
The IMF’s ‘Special Drawing Rights’ system currently includes the US dollar, the Japanese yen, the euro and the UK pound sterling.
The IMF reviews this only twice a decade. So why does allowing the yuan in matter? Bloombergsums it up. It…
‘…would allow the IMF to recognize the ascent of the world’s second-biggest economy while aiding China’s attempts to diminish the dollar’s dominance in global trade and finance.’
However, the US could potentially veto the yuan’s inclusion in the SDR basket regardless, according to the same Bloombergarticle. That’s because it holds the highest number of votes on the IMF executive.
What’s interesting about this is the IMF may want the yuan included to push its own agenda. Jim Rickards, author of The Death of Money puts it like this the book:
‘[including the yuan] is a stealth mechanism to enhance the yuan’s role as a reserve currency long before China itself has created a yuan bond market or opened its capital account.
‘If the SDR market becomes liquid, and the yuan is included in the SDR, bank dealers will discover ways to arbitrage one currency against the other and thereby increase the yuan’s use and attractiveness.
‘With regard to a future SDR bond market, the IMF study candidly concludes, “If there were political willingness to do so, these securities could constitute an embryo of global currency.”’
Rickards position is SDRs will be a key tool to bring about the demise of the US dollar based financial system.
Speaking of demises, another head looks like it may be rolling in China’s anticorruption purge. The Wall Street Journal reported on Tuesday that China’s ‘antigraft watchdog’ had placed Ling Jihua, a former aide to President Hu Jintao, under investigation.
This follows on from news earlier this month of the arrest of Zhou Yongkang, the former domestic security chief and the highest-ranking official to face charges so far. He is considered one of the most powerful men in China.
The scams, the cons and the corruption across the country are coming to light as President Xi Jinping smokes out stolen billions and graft, from the ‘flies’ (low ranking officials) to the ‘tigers’ (high ranking officials). And some of the stories are astonishing.
Take the case of Ding Yuxin. The Financial Times reported last week on the case of the ‘former egg seller’who admitted receiving an astonishing US$400 million in kickbacks from companies surrounding the construction of China’s US$2.5 trillion high speed rail network.
Yuxin is going to get twenty years jail. You might say that’s lucky. The former railways minister, Liu Zhijun, faces a death sentence for rigging contracts.
More from the Financial Times:
‘One of the People’s Liberation Army generals arrested earlier this year, Xu Caihou, had hoarded 12 truckloads of cash and gems, much of which had been provided by soldiers in return for promotions according to state media reports.
‘Such hauls are increasingly common even among lower-ranking officials, or “flies”. Ma Chaoqun, an executive at a state-owned water utility company, accumulated 37kg of gold and a property portfolio of 68 flats before he was arrested.’
Suffice to say, the effects of this are showing up in different places. One is the downturn for Macau casino stocks. A second is the news this week that the Chinese government has announced plans that owners of real estate will be required to register their holdings.
Apartments seemed to have been a handy way for officials to hide their black market money. A national registry will take time, but if it comes to fruition, it might provide a handy insight into China’s opaque property market.
Of course, there’s the suggestion that President Xi Jinping is merely using the corruption crackdown as a ruse to rout his rivals within the Communist Party and consolidate his power.
But the China watchers I follow think the reform is genuine — and intensifying. There could be a lot of people sweating in China right now.
The repercussions will reverberate across a lot of different industries and stocks. The SEC just fined beauty goods company Avon $135 million for bribing Chinese officials with luxury items, according to Reuters.
It’s possible — and I’m speculating here — this could drive even more Chinese money into the US, UK, Canada and Australia. Regardless, it’s certainly a trend to watch in 2015.
And with that, dear reader, we will bring this Markets and Money to an close, except to say, Merry Christmas and thanks for reading in 2014, and, we hope, in 2015. We’ll Reckon again shortly. Until then!
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