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Beijing Review Exclusive
Special> Coping With the Global Financial Crisis> Beijing Review Exclusive
UPDATED: September 28, 2009 NO. 39 OCTOBER 1, 2009
Crisis Focus: Renminbi Possibilities
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The International Monetary Fund (IMF) announced on September 2 that the People's Bank of China will purchase up to 32 billion Special Drawing Rights (SDRs), or around $50 billion of the IMF notes, as part of the international effort to ensure the adequacy of the financial resources available to the fund. Zhang Bin, a researcher at the Institute of World Economics and Politics under the Chinese Academy of Social Sciences, shared his insights on how the central bank's decision might influence the Chinese currency with Beijing Review. Edited excerpts follow:

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies.

The purchase, first of all, will alleviate the international payment problems of developing countries and emerging economies.

Since the IMF has not revealed how the money will be spent, it is difficult to judge the influence these actions will have on China. Several possibilities exist, each of which will result in a different impact.

If the IMF uses the renminbi it acquired from the Chinese central bank to buy dollar assets held by China, Chinese foreign exchange reserves will be more diversified as they include SDR-denominated assets. Considering the SDR is a basket of currencies, holding SDR assets will help China alleviate the loss incurred due to the dollar depreciating against other currencies.

By purchasing dollar assets or foreign currency-denominated assets from other financial institutions, (we suppose the IMF will most likely choose to buy U.S. Treasury securities), the IMF transaction will help keep U.S. Treasury securities and U.S. interest rates at a relatively low level for the time being. This will in turn maintain the value of dollar assets currently held by China and further boost the economic recovery worldwide. However, this decision, in the long run, will dampen the real dollar value because lower U.S. interest rates will intensify inflationary pressures in the future. In other words, it will eventually hurt the value of China's dollar assets.

Exchanging the acquired renminbi into U.S. dollars and making dollar loans to financially troubled countries, another possible action by the IMF, would also increase demand for the U.S. dollar. The impact on the Chinese foreign exchange reserves could result in a boon in the short term, but a bomb in the long run.

If the IMF does not exchange the renminbi it acquired for U.S. dollars, but directly issues renminbi loans to financial institutions or countries, the impact will depend on how the recipients spend the money. If the recipients purchase dollar assets to strike a balance on international payments, the impact on Chinese dollar assets will be similar to the abovementioned second and the third possibilities.

If those economies keep the renminbi they receive from the IMF as official reserve assets, and in the meantime reduce their dollar holdings, it will push ahead the internationalization of Chinese currency as an international reserve currency. Meanwhile, it will depress the international demand for the U.S. dollar, which will weigh down the value of dollar. Even though it will deal a blow to the value of Chinese dollar reserves, it is conducive to the renminbi's internationalization effort in the long run.



 
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