China nearly doubling the number of currencies to be included in its reference basket - BBH

Research team at BBH notes that yesterday there was an announcement by China that it was nearly doubling the number of currencies that it will be included in its reference basket.  

Key Quotes

“As we noted yesterday, the dollar's weight in the basket will be reduced by 4%.  However, we disagree with the media reports that suggest that this is an attempt by China to reduce the role of the dollar.   For example, in some media coverage, it is not even reported that the euro's weighting was cut by more than the dollar's share.”

“Given that, the dollar, euro, yen, and sterling's weightings were reduced, while mostly emerging market currencies were added, including incidentally, the Saudi riyal, which is pegged to the dollar, a fairer description may be the China adjusted its basket to give more weight to the emerging market currencies.  The Korean won was given a 10.8% weighting, making it the fourth most important currency, behind the dollar, euro, and yen.   Proportionately, it is almost half the weight of the US dollar.  One implication of this adjustment is that if the emerging market currencies weaken next year as we expect, then Chinese officials can continue to show that although it is falling against the dollar, it is stable against is basket.”

“This is largely a public relations and marketing ploy.  It has a little substantive impact.  When the PBOC intervenes in the foreign exchange market, it intervenes primarily against the dollar.  The US and other countries have numerous measures of the value of their currencies.  The value lies shedding light on the economic forces and impacts.  However, Chinese officials appear to be using their basket, the way it is said a drunk uses a lamp post, for support, not illumination.  Still, media reports that do not discuss the changes in the other currency weightings, like the euro, and instead assert that it is about the reducing the role of the dollar needlessly and mistakenly serve to confuse the issues and their importance.”