Tag Archives: currency

Would Chinese yuan challenge U.S. dollar as a reserve currency?

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

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.”

North Korea turning to human trafficking for foreign currency

WASHINGTON – To generate new income sources, the North Korean government has engaged in state-sponsored trafficking of its citizens, sending them to work as forced laborers in other countries and confiscating all or most of their wages, an issue of increased focus in the international community.

“I see it as just starting to get attention. It’s an emergent issue on the international agenda,” said Scott Snyder, senior fellow for Korea studies at the Council on Foreign Relations.

Both the Korea Economic Institute and the House’s Tom Lantos Human Rights Commission held meetings in Washington D.C. in April and May to address the trafficking.

North Korea, frequently ranked as the world’s worst human rights abuser, has lured between 50,000 and 60,000 citizens to work in industries around the globe with the promise they would keep their wages, according to a paper from the Database Center for North Korean Human Rights presented on Tuesday. Instead, the wages are sent to the North Korean government, generating as much as $2.3 billion per year.

Industries employing the laborers range from logging and mining to restaurants, and workers who complain or escape risk reprisal against themselves and their families who remain in North Korea, said Robert King, special envoy for North Korea Human Rights Issues at the State Department, at the House hearing.

Workers have been sent through bilateral contracts to around 40 countries, primarily Russia, China, Mongolia and nations in Africa, central Europe and the Middle East, according to a State Department Trafficking in Persons Report from March.

Snyder said the increased trafficking is one of North Korea’s ways of earning foreign exchange. Previously, the government sustained itself through other illicit means, such as drug trafficking, counterfeiting and weapon sales, but those income sources have been declining.

“They’re running a trade deficit with the rest of the world and it’s mostly shown in trade with China,” Snyder said.

“Whatever North Korea can do to make a profit it does, and much of it turns out to be illegal.”

One defector, Lim Il, told the Lantos commission that he had been a state employee in North Korea but went to Kuwait to work at a construction company, where he was required to put in 14-hour days under strict surveillance, with two days off per month.

“I think we were slave laborers,” Il said.

After escaping to the South Korean embassy, he learned that his salary had all gone to the Office of the Worker’s Party that manages foreign currency. “The money obtained through the export of laborers overseas [is] used as a personal fund for Kim Jong-un,” the Database Center for North Korean Human Rights paper said.

The U.S. and international community are facing difficulty curtailing the trafficking, said John Sifton, Asia advocacy director at Human Rights Watch at the House hearing. The biggest reasons are that most of the work occurs in Russia and China, it provides North Koreans minimal exposure to the outside world which may help undermine the government, and officials have not decided whether to approach it from a sanctions or human rights perspective.

“To address this is going to require attention and focus from the international community,” Snyder said. “And the best way of doing that would probably be to make this an issue of concern for the counterparts.”

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Internet currency Bitcoin lacks privacy protections

WASHINGTON — Bitcoin lacks the anonymity that many users have come to expect and desire, especially for a currency advertised as “cash for the Internet.”

All transactions made using the online currency is logged in a public ledger to ensure their validity.

“It’s inherent in the system to have it be transparent,” said Jim Harper, a senior fellow at the libertarian Cato Institute and a member of the board of directors at the Bitcoin Foundation. “You could have greater privacy if it was a system that one party controlled, but that would have costs relying on that party to get it right.”

Bitcoin is a digital currency that has no central authority and can be used, in many ways, like cash. Many businesses, from restaurants to WordPress, have begun to accept bitcoin as payment. To get started, it only takes a few minutes to go online to set up a Bitcoin wallet.

“It is fast and free,” said David Barrett, the CEO of Expensify, a company that supports Bitcoin use for international transactions. “It’s secure. And I would say it works everywhere in the world. And it is a very powerful technology for moving money around the world.”

Bitcoin offers an “acceptable level of privacy,” according to Bitcoin.org, which is managed by its developers. And for many Bitcoin users, any potential loss of privacy is an acceptable trade-off to circumvent traditional financial institutions.

“The idea of having this flexible payment system where you can pay someone on the other side of the world without having to turn to Western Union or something, that is quite an appealing concept,” said Sarah Meiklejohn, a lecturer at University College London who has done research on the currency.

Because this cybercurrency is not tied to any country or bank, it can be a relatively stable option for those in developing countries, where the local currency is often unreliable.

But, because of Bitcoin’s transparency, it is relatively easy to track a user’s entire transaction history. The public ledger shows the location of the Bitcoin user who is making a transaction as well as the history of the Bitcoin they are spending.

The public ledger shows a Bitcoin's transaction history and the user's location.

The public ledger shows a Bitcoin’s transaction history and the user’s location.

“It is kind of anonymous, but the second that you do any transaction with Bitcoin, every transaction is there,” said Barrett. “Once you pay me a bitcoin, basically I can look at the log and see every transaction you’ve made.”

Bitcoin.org claims no responsibility for any “losses, damages or claims,” for invasions of privacy or thefts, according to its terms and conditions. It suggests encrypting Bitcoin wallets and using secure connections to avoid thefts.

There are ways to improve the anonymity of the currency, but they require a concerted and technology-intensive effort that many do not even know is an option.

“There’s a thing called mixing, which is a process where you commingle your bitcoins with the bitcoins of others and the output of those transactions is harder to trace back to individuals,” said Harper, the Cato fellow. “It might make it a probabilistic calculation rather than drawing a direct line.”

This process is the equivalent to moving funds through banks in countries like the Cayman Islands and Panama which have strict bank-secrecy laws.

Today, some experts are cautious in accepting Bitcoin as a widespread currency. However, many see the Bitcoin concept as one that will remain.

“It’s actually a good alternative to a currency if there is inflation,” Barrett said. “In Venezuela and Africa, it is getting larger adoption. Russia also has a big growth in bitcoin. It’s a safer and less volatile way to keep your currency. Over time, Bitcoin will, in certain parts of the world, become a daily occurrence.”

Bitcoin and its supposed anonymity gained prominence in its role with the Silk Road, an online black marketplace known for selling illicit drugs and weapons. Buyers and sellers were able to connect virtually and use the cybercurrency to conduct anonymous transactions.

“This perception of anonymity might be driving groups towards Bitcoin, but then the transparency is giving law enforcement or anyone interested in these illicit transactions this beautiful view of all of these types of illicit transactions,” said Meiklejohn, the Bitcoin researcher. “Instead of going to somewhere like Western Union and wiring cash over to the Islamic State or whatever, if you’re doing it with Bitcoin then you are creating this paper trail that is never going to go away, literally ever.”

What may scare off more potential Bitcoin users, however, is not its lack of anonymity, it’s the volatility of the currency. In the last 12 months, the value of the currency has fallen by nearly half.

“Maybe I’m just cynical, but it’s hard to see why Bitcoin, as it is now, would achieve widespread adoption, which ultimately is what you would need to have any kind of stable currency,” Meiklejohn said. “So, as long as Bitcoin is this niche market, it is going to remain pretty volatile.”