China Joins the SDR – major expansion of RMB role and other global impacts of China’s investments in Africa and along the Silk Roads

It appears that China is, indeed, joining the Dollar, the Euro, Sterling and the Yen in the SDR of the IMF. Means we can expect an expansion of China’s percentage of world currencies to move from 2pc towards 10 pc over the next 5-7 years. They will achieve it by financing development. The USA and UK achieved it by creating large trade deficits. China is again confounding traditional economics.

 

The F.T. today reported that China would invest over $1 trillion in Africa over the next 10 years, largely in infrastructure with transport being the primary area. The actual figure is expected to be much higher, according to American law firm Baker and McKenzie. China already leads the world in investment in Africa. China will help Africa to grow through a modern infrastructure of rail and roads and sea. We should expect it to be more on the East coast linking up with the New Silk Roads (OBOR).

 

In another story the FT reported China Development Bank saying that $960bn contracts already under way in OBOR this year, and my estimates are that this $1 trillion a year will be maintained for more than 10 years. China will use CDB and Exim Bank plus AIIB and the China Silk Fund, and the New BRICS Bank and a yet to be announced SCO bank. Additionally these banks will use their own leverage and they will issue large bonds, which will also feature for Chinese corporates.

 

Spencer Lake of HSBC has echoed my advice that new financial centres will emerge along the New Silk Roads to add to the role of the RMB and new regional financial centres. This is both an opportunity and a threat to London.

 

It is moving at breath-taking speed. A new high speed rail line from China to Iran has been announced and this will eventually link to Turkey and Greece, which links with another high speed line already moving ahead linking Greece, Serbia and Rumania.

 

There are two mistakes being made about China’s moves into global and regional infrastructure. First is to mistakenly see early opportunities for British companies. The second is the typical cynical comment about the problems.

 

Who can engage with these opportunities and how to do it is something the 48 Group Club will advise its corporate members on. While we are not a formal consulting company we can help with guidance.

 

The world is changing again in front of our eyes. I recall a Deputy Chairman of the Bank of England trying to tell me I was wrong and that China’s building of forex reserves was a mercantilist operation. After reaching for my dictionary to check myself , I responded that he would see that China was building reserves for a reason but mercantilism was not one of them.

 

That was around 2008 and now we can see why China built reserves. Firstly to protect itself from a USA backed attempt to force China to raise its RMB rate as they had forced Japan to do. Secondly to prepare for a reshaping of Asian, European and African infrastructure to produce a new urban development and a new transport system for the world’s main land mass.

 

Stephen

 



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