Monetary and Financial Institutions ● Asset Management ● Global Money and Credit Navigating the Tempest Renminbi Floats Into Rougher Seas
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October 2014 The Bulletin Vol. 5 Ed. 9 Official monetary and financial institutions ● Asset management ● Global money and credit Navigating the tempest Renminbi floats into rougher seas Claudia Buch on Europe’s path to banking union Meghnad Desai and Graham Hacche on IMF reform Trevor Greetham on dollar and sterling strength Julia Leung on Chinese liberalisation experiments Ruud Lubbers & Paul van Seters on energy integration Shumpei Takemori on next steps for Abenomics Asset management: Norway v. Japan, Germany v.China Contents Cover story International monetary policy Confrontation over restrictions on Hong Scottish questions still unanswered Colin Robertson 5 Kong democracy is one of the factors clouding the renminbi landscape. As How IMF’s adaptability keeps it relevant Graham Hacche 8 the Chinese authorities sail towards the rougher seas of financial liberalisation, Functionality and need for IMF reform Meghnad Desai 9 Beijing may have to navigate the tempest. The October Bulletin, featuring issues Doves rule the roost at the Fed for now Darrell Delamaide 10 likely to surface at the annual IMF/World How to counter threat of rising interest rates George Hoguet, Geoff Kelley & Ric Thomas 11 Bank meetings in Washington, has a specifically Asian focus. As well as the Three arrows, and three questions Shumpei Takemori 12 course of Abenomics, we focus on fears that Hong Kong troubles could spread World economy in disinflationary recovery Trevor Greetham 13 to the mainland, limits on the Shanghai experiment on financial reform, and China’s task in managing its foreign assets. See p.20-21. Europe and the euro Fiscal backdrops are needed Claudia Buch 14 Behind the manoeuvring, a struggle for power Markus C. Kerber 15 Ukraine crisis hits German economy Stefan Bielmeier 16 At last, European energy union Ruud Lubbers & Paul van Seters 17 Emerging markets China’s baby steps towards financial reform Julia Leung 20 Hong Kong and Beijing at odds Jonathan Fenby 21 Global asset management Asset allocation Norway shows Japan the way 22 In the first of a series, OMFIF looks at China-German tale of monetary parallels 24 contrasts between Japan’s and Norway’s largest public sector asset managers as well as the different policies followed Book review by China and Germany in husbanding foreign assets. See p.22-25. How press restraint can go too far William Keegan 26 Renminbi faces hurdles to enter reserves ‘magic circle’ The renminbi could develop further as a world currency by entering the Special Drawing Right, the International Monetary Fund’s composite currency unit used in official financial transactions and reserves. Beijing faces a challenge next year in meeting a number of criteria to move into the ‘magic circle’ of currencies ranked as official reserve assets. But measures already taken by the Chinese authorities to internationalise the currency, and a big increase in financial market interest in the renminbi, are pointing towards a possible broadening of the SDR’s composition from January 2016, in spite of the renminbi’s formal inconvertibility. The renminbi’s addition to the reserve currencies in the SDR, currently comprising the dollar, euro, yen and sterling, has already been advanced by a ground-breaking decision by the British government to issue renminbi-denominated bonds, and allow the proceeds to be held in the UK reserves managed by the Bank of England, breaking two long-held taboos for the UK authorities. 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Company Number: 7032533 4 www.omfif.org EDITORIAL Renminbi shift adjusts Bretton Woods landscape he contours of the word monetary order are evolving, and it is China and its allies who are moving them. The Bundesbank, Twhich OMFIF visits again in October for our Fifth Main Meeting in Europe, once sought to prevent the D-mark from becoming an important reserve currency, for fear of losing monetary control – and ended up with the euro, a currency over which Germany has too little control for its own liking, yet too much in the eyes of some Europeans. By contrast, the Chinese authorities are now actively seeking a widespread international trade and investment role for the renminbi, including in official assets. The UK Treasury, which tends to take a conservative line over international monetary affairs, has helped the Chinese buttress their own global currency credentials by announcing that it will borrowing in renminbi and hold the proceeds in the British official reserves. With a wide range of underlying motivations, China and other leading emerging market economies (Brazil, Russia, India, South Africa) back the notion of gradually dislodging the US from its primary position in today’s unipolar world. This shift in polarity, and the repercussions for the US, Europe, Japan and the emerging market economies, are all expounded in this month’s Bulletin. The Brics are actively challenging the status quo by launching their own development bank. Graham Hacche writes that the rationale is much more complex than simply competition with the World Bank and International Monetary Fund. Meghnad Desai describes the institutional manoeuvrings as part of a much