Does China Belong at the Grownups table in international finance?

Paola Subacch writes:  The IMF has given a huge vote of confidence in China’s capacity to play a major role in international finance.

Many market participants, however, remain skeptical about the decision. Does the renminbi really belong in the same category as the US dollar, the euro, the Japanese yen, and the British pound in the international monetary system?

No doubt, China has made remarkable progress over a relatively short period. Since 2009, the share of China’s trade settled in renminbi has increased from less than 1% to more than 20%. And the renminbi now ranks fourth among the world’s currencies used for international payments.

But the renminbi’s 3% share in global payments lags far behind that of the dollar (45%) and the euro (27%). Moreover, growth in the use of the renminbi to settle trade has been concentrated largely in the Asia-Pacific region, and specifically in transactions between China and its neighbors. And demand for renminbi-denominated assets remains relatively low, with a mere 1.5% of total renminbi bank deposits held outside China.

The contrast between the renminbi and its SDR counterparts is stark. The renminbi offshore bond market amounts to just 0.5% of the world’s total, with 40% issued in dollars, 41% in euros, nearly 10% in pounds, and 2% in yen. The value of loans denominated in renminbi – CN¥188 billion ($29.2 billion) – is tiny, especially when one considers that almost 50% of total international banking liabilities are denominated in dollars, approximately 30% in euros, 5% in pounds, and about 3% in yen. And the renminbi accounts for 0.6-1% of global foreign-exchange reserves held by central banks, whereas the dollar and the euro account for 62% and 23%, respectively.

In short, unlike the rest of the currencies in the SDR basket, the renminbi is an international currency in the making, just as China is an economic and financial power in the making. Indeed, like most developing countries, China remains an “immature creditor” that lends mainly in dollars; and if it needed to borrow in international markets, it would have to issue most of its debt in dollars, not renminbi. Clearly, China’s standing in international finance does not match its status in international trade.

Nonetheless, there is a distinct sense that the renminbi will become a key player in global financial markets. After all, unlike other developing countries – even large ones like Brazil, India, and Russia – China has an economy that is large enough to provide critical mass to its currency’s development.

Furthermore, Chinese leaders are determined to push through reforms – especially of the banking sector and state-owned enterprises – that will help drive forward this development. They have made it clear that one of their key goals for the next five years is to narrow the gap between the international standing of the renminbi and that of the world’s “great currencies,” as they promote use of the renminbi far beyond the Asia-Pacific region.

It is important to note, however, that China’s leaders do not seem to be angling for the renminbi to replace the dollar as the dominant international currency. Their approach – based on the belief that a more diversified, and thus more liquid, international monetary system would contribute to a more balanced and less volatile global economy – is more pragmatic. Anticipating a shift from a dollar-based (and, more broadly, US-dominated) system toward a multi-currency, multipolar system, China’s leaders are laying the groundwork for their country (and its currency) to grasp one of the positions at the top, alongside other great powers.

While some countries – the United States and Japan, in particular – are far from enthusiastic about that, it is difficult to deny what seems inevitable (neither country formally opposed the SDR decision when it came). And, as China gains more financial clout, its role in global economic governance will undoubtedly grow as well.

Given all of this, it is unsurprising that the reform of the international monetary system and its governance will feature prominently at next year’s G-20 summit, hosted by China, which will hold the group’s rotating presidency. It is not yet clear how China will shape the debate. But the mere fact that it will happen at the G-20, rather than at the long-dominant G-7, sends a clear message that the global economic and monetary system is changing for good.

Two women are instrumental in handling the EU economy.  The European Union passed the first in a series of critical reforms, establishing a new centralized supervisory authority over the monetary union’s largest banks. In October 2014, European Central Bank will have access to financial data for banks across the continent. This authority will be used to identify bank weaknesses before they threaten the EU, as they did during the European sovereign debt crisis.

It’s the first of three pillars that European leaders say would guarantee a similar crisis doesn’t occur in the future. The other two – the creation of a joint deposit guarantee account and the authority to wind down banks with a unified financial backstop – will be considered in the coming year. The passage of the first pillar is another sign of economic progress for a continent where the news has been bleak for years. The EU and the world have two people in particular to thank for that progress: German Chancellor Angela Merkel and International Monetary Fund chief Christine Lagarde.

Is a climate deal good to go?  The European Union has formed an alliance with 79 African, Caribbean and Pacific countries in a final push for agreement at the climate summit COP21.  The new alliance has agreed a common position on some of the most divisive aspects of the proposed deal.  They say the Paris agreement must be legally binding, inclusive and fair – and be reviewed every 5 years.  The EU will pay €475 million ($522 million) to support climate action in the partner countries up to 2020.  The alliance has also agreed that the Paris text must include a “transparency and accountability system” to track nations’ progress on their climate pledges, and share best practice.

Ben Taub writes:

One of Russia’s nine deputy defense ministers, said that recently collected images constitute “hard evidence” that there is “a single team acting in the region, composed of criminals and Turkish elites,” who are buying oil from ISIS “on an industrial scale.”

Russian President Vladimir Putin announced, “We have every reason to think that the decision to shoot down our plane was dictated by the desire to protect the oil-supply lines to Turkish territory,” specifically, those funding ISIS.

A defense minister went a step further.   “This illegal business involves the country’s senior political leadership, including President Erdoğan and his family members,” he said. “Maybe I’m being too blunt, but one can only entrust control over this thieving business to one’s closest associates.”  Erdogan’s son-in-law had recently been appointed minister of energy and natural resources. “Of course, the dirty oil money will work,” he added.

In fact, one of Russia’s satellite photographs showed a very familiar place. I first walked through the Bab al-Salama border crossing in April, 2013, and lived within sight of it for the next two summers. Then, too, trucks often lined the road leading down to the border gates, many of them parked for hours while drivers napped in an olive grove nearby, waiting for inspectors to finish checking the vehicles ahead of them. On the Turkish side, fourteen thousand Syrian refugees lived in a container camp nestled against the border. Beyond the Syrian gates, a comparable number of civilians lived at a transit camp under wretched conditions. A system of hoses transported clean drinking water from Turkey into huge tanks at the Syrian camp, but there was no way to dispose of waste, and it gathered in puddles next to the road and ruts in the mud. Both camps sprang up from nothing, out of necessity, as people from Aleppo and the villages to its north tried to escape the war. (Fleeing didn’t always help; in June, 2013, a Syrian jet strafed the transit camp, killing seven refugees.) Both camps are plainly visible in the Russian satellite pictures..

The practice of smuggling at the Turkish-Syrian border is decades older than the war. Aleppo once belonged to the Ottoman Empire; when it was cut off from Turkey, in 1924, after the Treaty of Lausanne established most of the modern border, locals continued transporting all manner of goods from the cheaper side to the more expensive side.

Syria’s most potent oilfields are in the Deir Ezzor province, largely under ISIS control. The group earns most of its money by taxing locals and confiscating valuables at checkpoints, but oil sales still account for hundreds of millions of dollars of revenue.

Last year, the journalist Mike Giglio found that much of the oil was coming through a smuggling post and originated in ISIS territory, many miles away. It was transported by middlemen to a nearby area in northwest Syria. In Besaslan, traders received the oil through a network of buried pipes, while spotters looked out for police. They filled drums and sold them to local Turkish businessmen, who, in turn, cut secret deals with gas stations or set up illegal filling stops.

The Turkish government maintains murky alliances with a number of Islamist rebel groups in Syria. In January, 2014, three trucks escorted by the intelligence services were found to be transporting huge quantities of ammunition to a camp frequented by rebels with connections to Al Qaeda, according to an arrest order for one of the drivers. The Turkish newspaper Cumhuriyet published a video of the trucks, and last week its editor-in-chief was arrested on charges of collecting and revealing secret documents. Erdoğan insisted the trucks were carrying “humanitarian aid” for Turkmen in Syria, and personally accused the Cumhuriyet editor of “attempting to overthrow the government” of Turkey.