China wants its currency to play a more significant role in world affairs. Can it challenge the dollar? (Lei Xuan / Medill News Service)

WASHINGTON – The International Monetary Fund is currently assessing whether the Chinese yuan — also called renminbi – has met the standards to be included in its Special Drawing Rights basket. China says such inclusion would allow its currency to play a more significant role in world affairs and is anxiously awaiting the result.

Di Dongsheng, a visiting Chinese scholar to Georgetown University, first heard that the yuan was not likely to be included when he attended the IMF spring meetings in April. However, two weeks later, he learned that its chance for inclusion was much improved.

Di wrote an informal report to his friends in Beijing, some of whom work for the Chinese government. “They are interested in the issue,” Di said.

The SDR basket currently includes dollar, yen, euro and British pound. According to the IMF, the SDR is not a currency. It can only be exchanged among IMF member countries and can’t be traded in the financial market.

The value of the SDR is determined daily by the IMF on the basis of the componential currencies, instead of being directly determined by the supply and demand of the market.

When there is not enough liquidity, the SDR can be exchanged to freely usable currencies to balance a country’s account.

The IMF says it adjusts the basket every five years to reflect “the relative importance of currencies in the world’s trading and financial systems.” In 2010, the yuan was declined to be included due to it didn’t meet the requirement of being “freely usable.”

If approved this year, the yuan would be recognized as the world’s fifth reserve currency, and its international role would be elevated.

The Chinese authorities “have expressed a very strong interest in inclusion in the SDR basket,” said IMF Deputy Spokesman William Murray. “This expression of interest is being taken very seriously by the IMF.”

The IMF is taking “very active analysis” to review China’s request to include the yuan in the fund’s SDR basket, according to Murray when answering a question from Medill News Service.

David Dollar, a senior fellow with the Foreign Policy and Global Economy and Development programs of the Brookings Institution, said inclusion of the yuan in the SDR basket is “largely symbolic, because it doesn’t have that much practical implication.”

“But it would be a signal that Chinese yuan is now one of the five main currencies in the world,” Dollar said in an interview.

The IMF executive board will hold a formal review at the end of the year. Inclusion of the yuan needs at least 70 percent of voting shares from IMF member countries. If the IMF decides the inclusion is “a fundamental change,” it would require 85 percent voting shares. The U.S. alone holds 16.74 percent of voting rights, which means the U.S. has the veto power.

The U.S. has long accused China of manipulating the yuan and urging it to achieve a market-based exchange rate. And a disagreement on the yuan between the IMF and the U.S. would cast doubts on whether it could join the world’s reserve currency club.

In an annual Chinese economy review statement recently, the IMF said the yuan is no longer undervalued.

However, the U.S. disagreed. “We continue to think it’s undervalued,” Secretary of Treasury Jack Lew said last week during a dialogue in London.

Lew said the U.S. has urged China to open its currency and have “a market-determined exchange rate that makes it freely convertible.”

“They still get some work to do moving on that path,” said Lew, who pushes China to continue its reforms, although he also said China has made a lot of progress.

“I think that [the reform] is heavily in China’s external economic interest. It’s in global economic interest and it’s in the U.S. economic interest,” Lew said.

“The U.S. is still quite conservative on the SDR issue,” said an economist who works for the Chinese government, speaking on the condition of anonymity because she was not allowed to talk to media without permission. “China still faces resistance,” she said.

She added that she thought the U.S. is cautious about any possible change of the current financial system.

“I cannot speculate what the U.S. government is going to say on this,” said Gian Maria Milesi-Ferretti, a deputy head of World Economic Outlook in the Research Department at the IMF in an interview. “It is a review done by the IMF, and we’ll see what the executive board will decide.”

Yangcheng Evening News, one of the leading newspapers in South China, called the SDR issue a “new fight” after the Asian Infrastructure Investment Bank in the current financial system between China and the U.S.

Traditional U.S. allies include the U.K. and Australia all joined the AIIB, whereas the U.S. and Japan chose to stay out of the China-backed investment bank.

The Chinese newspaper said, on the SDR issue, the “opposition” from the U.S. was due to the fact that the increasing demand of the yuan from central banks would possibly pose a threat to America’s dominance in the global political economy.

“Other currencies that included in the SDR are all important reserve currencies,” said Dollar, “(but) none of them have challenged the dollar as a primary reserve currency. I think it would take a long time for the Chinese yuan to compete with the dollar to be a primary reserve currency.”

Dollar said he is “cautiously optimistic” to see the Chinese yuan being included in the SDR this year.

“The U.S. and China will discuss this in the Strategic and Economic Dialogue in Washington (in June). (China’s) President Xi Jinping will visit Washington in September. So I think there is a pretty good chance that the Chinese yuan will be included in the SDR this year,” he said.

“You cannot decree that a currency will be an important international currency. The market determines that,” said Edwin Truman, nonresident senior fellow at the Peterson Institute for International Economics.

According to the IMF, at the end of 2014, 62.9 percent of international reserves among global central banks were U.S. dollars. An HSBC survey of global reserve managers showed that they expected the yuan to become the world’s second largest reserve currency by taking a 12.5 percent market share in 2030, though it would still fall behind the dollar.

While the SDR does not directly reflect the needs from the market, it only has a symbolic meaning. However, using the SDR as a substitutable reserve currency of the dollar would be another issue.

Back in 2009, China’s central bank Governor Zhou Xiaochuan advocated a new international reserve currency in an article.

“The desirable goal of reforming the international monetary system,” Zhou wrote, hinting that the dollar should be replace, “is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.”

President Barack Obama dismissed the need to replace the U.S. dollar shortly after Zhou’s article.

Dollar, the economist, said he doesn’t see any big changes coming anytime soon.

“I don’t think there is any follow-up about that discussion,” said Dollar. “Right now the dollar is the premium reserve currency. I don’t think that is going to change in the next few decades.”

Vice President Joe Biden on Wednesday sternly warned that sanctions on Russia will continue until the cease-fire agreement in Ukraine is fully implemented. (Lei Xuan /MEDILL NSJI)

WASHINGTON — “The United States sanctions on Russia must and will remain in place until the Minsk Agreement is fully implemented,” said Biden at the Brookings Institution, a Washington-based think tank.

The Minsk Agreement, also referred to as Minsk II, is an updated cease-fire agreement reached by Ukraine, Russia, Germany and France in February to end the conflict between government forces and Russian-backed rebels in eastern Ukraine.

However, fighting between Ukrainian troops and separatists continues.

“It’s now been 14 months since Russian aggression against Ukraine last spring, and it has literally transformed the landscape of European security,” Biden said.

The U.S. and its allies need to “ensure the further aggression on Russia’s part is met with further costs if Russia again moves beyond the line of contact. This is essential to our strategy,” Biden said.

Biden said he thought Russian President Vladimir Putin is practical and will eventually bow to demands. “At his core, he will push as far as he can, in my view, until he reaches a resistance that, in fact, says there is a big price to pay.”

The vice president said the goal in Ukraine is about peace in Europe, not running Russia for Putin.

“We are not looking to embarrass him, we are not looking for a regime change, (and) we are not looking for any fundamental alteration,” said Biden. “We are looking for him to, in our view, act more rationally.”

Michael E. O’Hanlon, a senior fellow at Brookings, said this is crucial moment because the European Union is reconsidering that sanctions on Russia.

“The United States needs to send a message to Europe about the fact that we are still committed to this issue, still committed to the existing policy, still paying attention, and we still perceive the need for patience and endurance and results in how the West collectively keeps the sanctions in place until there is in fact some kind of change in Russian behavior,” O’Hanlon said.

Biden also defended American efforts to cooperate with Russia, including nuclear talks with Iran and global counterterrorism efforts.

“It makes sense to cooperate where there is a clear mutual interest as long as you are not being asked to back off,” said Biden during the question-and-answer session shortly after his remarks. “Matters of principle that matter to the security and well-being of your country and your allies and your friends. So, quite frankly, I see it being overwhelmingly in our interest to continue to cooperate in Iran.”

President Obama said Tuesday that Russia has taken an “increasingly aggressive posture” on the Ukraine issue during a meeting with NATO Secretary-General Jens Stoltenberg at the White House.

“And we affirmed that NATO is the cornerstone not just of transatlantic security, but in many ways, is the cornerstone for global security,” Obama said.

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“It’s time for the country to take some bolda steps forward,” said Foxx, during a panel discussion at Bloomberg Government.

The federal government currently raises money for highway construction and transit programs through the Highway Trust Fund, which collects money from gasoline and diesel fuel taxes and is set to run out of money on May 31.

The gasoline tax and the diesel tax have been stuck at 18.4 cents per gallon and 24.4 cent per gallon, separately, since 1993.

“Businesses are wasting resources because our infrastructure is falling behind,” said Lew, who pointed out the U.S. was ranked 12th in global competitiveness by the World Economic Forum due to insufficient infrastructure investment.

“Look at the things we need to build a stronger future, infrastructure is right at the top of these,” Lew said.

The Transportation Department has unveiled a six-year Grow America Act plan that would spur infrastructure investment by raising the repatriation tax, but Republicans in Congress have not widely embraced the initiative.

“The best way to fund infrastructure for the long term is to tie it to something that is broadly popular,” said Lew. “That’s why we tie it to business tax reform.”

American multinational firms often keep overseas earnings abroad because they would otherwise have to pay as much as 40% in U.S taxes, according to KPMG, the accounting and tax firm.

In the administration’s proposal, firms would pay about 14% in repatriation, with proceeds from the tax going to fund domestic infrastructure projects.

“Democrats and Republicans in Congress want to have a long-term bill,” said lobbyist Cliff Madison, president of Government Relations, Inc. “However, they haven’t agreed on the sources for funding, whether it is going to be an increase on the gas tax or the repatriation of U.S. money from overseas.”

Foxx also said he is willing to listen to other solutions from Congress.

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President Barack Obama and Japanese Prime Minister Shinzo Abe held a joint press conference at the White House on April 28. (Lei Xuan / Medill)

WASHINGTON – During Japanese Prime Minister Shinzo Abe’s recent state visit to Washington, both President Barack Obama and Abe highlighted the importance of the Trans-Pacific Partnership not only in terms of economic prosperity, but also the national security of both countries.

“The TPP goes far beyond just economic benefits,” said Abe during a speech to the U.S. Congress on Wednesday, April 29. “It is also about our security.”

“Let’s bring the TPP to a successful conclusion through our joint leadership,” said Japanese Prime Minister Shinzo Abe in his speech before U.S. Congress. (Lei Xuan / Medill)

However, after 20 rounds of negotiations since 2010, the key multinational trade agreement, commonly referred to as the TPP, still hasn’t been completed. The U.S. expects 11 other countries –including key trading partners Japan, Australia and Singapore – to adopt higher standards in areas like intellectual property and environmental protection.

Both Obama and Abe want to pass TPP as soon as possible. But the job has never been easy. Differences exist between those countries.

Most notably, the U.S. and Japan, the two largest economies in the TPP negotiations, can’t reach deals over agricultural issues and automobiles. Japanese farmers and automakers fear that their products will be less competitive in Japan’s domestic market than cheaper imports under the TPP framework.

In the U.S., lawmakers are reluctant to authorize the Trade Promotion Authority (TPA), a measure that will give Obama more authority over trade negotiations and accelerate multilateral TPP talks.

“In general, trade agreements are actually an exercise in foreign policy,” said Mireya Solis, a senor fellow at the Brookings Institution’s Center for East Asia Policy Studies.

Solis said TPP is an integral component of the United States’ “pivot to Asia” policy, in which the Obama administration seeks to devote more resources to the region. However, China sees the policy as a hedge against its increasing influence.

“It cannot just be a military redeployment,” Solis said. “The rebalance is more compelling and more attractive if you have some economic dimensions.”

In a recent speech about the next phase of the U.S. rebalance to the Asia-Pacific, Secretary of Defense Ashton Carter said, “passing TPP is as important to me as another aircraft carrier.”

“Trade in general is a big issue for national security,” said Andrea Montanino, director of the Atlantic Council, a Washington-based think tank that held an event on how trade strengthens U.S. national security and foreign policy last month.

The event, which featured Secretary of States John Kerry as a keynote speaker, concluded that America wants to reaffirm its leadership in the Asia-Pacific area by setting up future trade rules. “Why would you sit on the sideline, let other people do that?” asked Kerry.

Obama addressed the same issue in a recent interview with the Wall Street Journal. “If we don’t write the rules, China will write the rules out in that region,” he said. “We will be shut out, American businesses and American agriculture.”

Earlier this year, traditional U.S. allies including Australia, South Korea and European countries joined the China-proposed Asian Infrastructure Investment Bank in tandem, whereas Japan opted to stay away from the AIIB with the U.S.

Although the AIIB is still in its infancy, some critics have started questioning America’s leadership in Asia. “This past month (March 2015) may be remembered as the moment the United States lost its role as the underwriter of the global economic system,” wrote former Treasury Secretary Larry Summers on his website.

The U.S., with its staunch ally Japan, needs TPP to reaffirm its leadership in Asia, though the pressure may not directly come from the AIIB, because they are separate issues, Montanino said, adding that reaching a regional trade agreement would be much more powerful than setting up a bank.

“In a national security context, anytime the U.S. and Japan can’t agree, it casts doubts on the future of the bilateral security relationship,” said Edward Lincoln, an expert on Japan and an adjunct professor at the Department of Economics at Columbia University. “If we can’t reach an agreement, that will make us look very bad.”

Lincoln opined that Obama’s desire to create a positive legacy for his presidency and Abe’s need to claim success on Abenomics will drive both sides to an agreement on the bilateral part of the negotiations.

But Lincoln said Abe would be the one that particularly needs TPP. Besides Abe has to show his seriousness on joining TPP because he promised to do so, and because “he needs to be able to say the U.S. is a friend,” according to Lincoln.

“The circumstances that are surrounding TPP today is making itself like the last chance to change the status quo toward a positive way,” said a Japanese fellow with a U.S. think tank, speaking on the condition of anonymity. He said on the economic side, Japan needs to implement its structural reform, whereas on the geostrategic side, Japan and the U.S. are strengthening their alliance.

He said, however, both Japan and the U.S. are pursuing other free-trade agreements with other countries. For example, the U.S. is also in negotiations with European countries on a Transatlantic Trade and Investment Partnership, and Japan is discussing the framework of a Regional Comprehensive Economic Partnership with China and South Korea.

“I think it’s partly because the executive branches of both countries had to use this logic to persuade their domestic politics and the media to energize this debate. In that sense, I think TPP is a battle both Japan and the U.S. can’t afford to lose,” the anonymous Japanese expert said.