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3 Apr 2009

International Economy

China Pushes SDRs Along with Increased Yuan Role: Affecting USD (Current Issue No.2149)

The use of Special Drawing Rights (SDR) as a ;super-sovereign currency” in place of the US Dollar was initiated by the People's Bank of China Governor in the run-up to the recent G-20 meeting. KASIKORN RESEARCH CENTER (KResearch) holds the view that there are some advantages to supplanting the US Dollar with the SDRs. The SDRs, created by the International Monetary Fund (IMF), may help lessen the adverse impacts of currency volatility on the global economy and financial markets. In addition, the US, whose currency is now used as an international reserve currency, may be able to rectify its chronic current account imbalance without affecting other countries via their stronger currencies. On the downside, the SDRs have a limited role in commerce and is inferior to the US Dollar in functioning as a global currency.
Even so, the SDRs may assume a greater role in the future if this currency substitute undergoes serious development to accommodate the complex international financial system. However, KResearch holds the view that widespread use and acceptance of the SDRs in the world's economic and financial system is unlikely to be seen in the near future. Physically speaking, the volume and liquidity of the SDRs is still far from sufficient to accommodate financial, trade and investment transactions on a worldwide scale. To increase the volume of SDRs in the market sufficient for future requirement, primary concern should be availability of the back-up assets, including the confidence of international investors toward the International Monetary Fund (IMF) – the issuer of the SDRs - which has no other proprietary financial resources, than contributions from member countries.
In KResearch's view, the US Dollar (USD) and Euro will remain the main international reserve currencies for the foreseeable future, though the USD's role may be receding. Even so, the US Dollar's dominance in the global arena continue for some time, thanks to its safe-haven appeal, the US ;AAA” sovereign ratings, high liquidity in international trade, plus the status of the US as the world's pre-eminent economic, political and military superpower.
KResearch believes that many questions are left unanswered in replacing the USD with SDRs. The push for another reserve currency in place of the US Dollar may evaporate if the US economy stabilizes and/or the possibility of further global economic deterioration eases. Nonetheless, close attention should be paid to the role of Yuan in international trade, especially after the string of bilateral Yuan swap agreements China has recently concluded with several trade partners. The move suggests that China is extending the Yuan's global reach in order to reduce their reliance on the US Dollar in international transactions.

For Thailand, we have significantly increased our bilateral trade and investment with China in recent years. (China was Thailand's fifth largest export market in 2008, accounting for 9.1 percent of Thailand's total exports.) It is likely that the Yuan may become more important in our bilateral trade with China, especially if China enters into a bilateral currency swap with Thailand, as they have with several countries in the ASEAN+3 forum.

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International Economy