A few weeks ago, the IMF entered into an agreement with China to allow the Asian power to begin financializing M SDR bonds once an audit was completed regarding their reserves and banking system. And on Aug. 12, the World Bank publicly gave their approval as well to China, which in the coming months will be the sole authority in issuing M SDR denominated bonds for use in international settlement.
Underlying the significance of this new program is that two Western financial entities are providing tacit approval to China rather than the United States, and are entering into the first major step towards ending the polar global reserve currency system that has been prevalent in the world since the Bretton Woods agreement of 1946.
In addition to China soon becoming the caretaker of SDR internationalization and distribution, the Chinese central bank also reported this week that use of their currency has increased in one year by over 21% in cross-border settlement. This means that the use of the RMB more than the dollar is becoming the preferred currency for direct bi-lateral trade.
Over the past two years, China has said explicitly that they do not wish to supplant the dollar and become caretakers to a singular global reserve currency, but rather to incorporate a basket of currencies to act in this position. And interestingly enough, their acceptance into the IMF’s SDR program while also being given the authority to administer and propagate it globally, shows just how far China has grown in being recognized as the future manager over global finance.
Right now, China owns several of the world’s largest banks, including the number one spot with the Industrial and Commercial Bank of China (ICBC). In addition, they are the world’s largest industrial economy which makes them a perfect candidate to manage the next reserve currency instrument and expand its use across the globe.
As we know from China historically, these new steps are just the beginning of a much grander overall plan, which one day will see the RMB, the SDR, and all global trade become one where letters of credit are once again are undertaken through a new form of a gold standard.