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Andrew Batson — SDR inclusion as commitment device

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Perhaps another way of putting this is that SDR inclusion is a commitment device. In addition to the practical concerns raised by Zhou, there would also be reputational costs to reversing exchange-rate and capital-account reforms. Since SDR inclusion is contingent on the IMF’s determination that the renminbi is “freely usable,” it could conceivably be reversed if the currency were to stop being freely usable. What future Chinese central bank governor will want to see headlines screaming “IMF expels renminbi from SDR”? Of course, China over the past year has in fact been de-facto tightening capital controls by stepping up scrutiny of overseas M&A and slowing down approval of foreign-exchange transactions. But it has done so largely by using its regulatory discretion rather than changing

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Perhaps another way of putting this is that SDR inclusion is a commitment device. In addition to the practical concerns raised by Zhou, there would also be reputational costs to reversing exchange-rate and capital-account reforms. Since SDR inclusion is contingent on the IMF’s determination that the renminbi is “freely usable,” it could conceivably be reversed if the currency were to stop being freely usable. What future Chinese central bank governor will want to see headlines screaming “IMF expels renminbi from SDR”?
Of course, China over the past year has in fact been de-facto tightening capital controls by stepping up scrutiny of overseas M&A and slowing down approval of foreign-exchange transactions. But it has done so largely by using its regulatory discretion rather than changing formal rules. So perhaps the commitment device is working some....
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SDR inclusion as commitment device
Andrew Batson
Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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