What's the impact of adding RMB into the SDR basket

Before discussing about what the impact to RMB after it is added into the SDR basket, it is worth explaining what SDR is. SDR stands for Special Drawing Right. According to the explanation of the IMF, "The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations."

Based on this explanation, we can see that adding RMB into the SDR basket does not directly give values to RMB; therefore, it may be able to add some chemicals into the foreign exchange market but in the long term, the value of RMB will still be determined by the central bank monetary policy and the Chinese trading position. The real impact of adding RMB into the SDR is setting up a milestone of international acceptance. Such action could allow the Chinese currency, the RMB, to integrate more into the global financial activities.

The addition of the RMB lowers the proportions of the other four currencies in the SDR basket. The USD has the smallest cut in its position, then the JPY, then the EUR, and the GBP has the largest cut in its position in the SDR basket. This shows how the IMF sees the recent changes in the global trading importance of the five countries. Moreover, in terms of the shares of the five different currencies, the USD still holds the dominating position, and the GBP and the JPY seem much weaker than the other three. In addition, as the SDR basket is reviewed every five years, if we can see an increase in the RMB's share in the SDR basket, then it will be much fairer to say that the Chinese currency has increased its global importance and acceptance.

Housing bubble?

For a long time, many economists have warned there is a big bubble in the Chinese property market and also explained the serious consequence when the bubble is burst. This week, Jianlin Wang, whose company is China's largest commercial property developer, also warned that the Chinese property market was the biggest bubble in history.

Such comments are not new at all, and as usual the market ignores the warnings and the sales in 52 cities in China experience a year-on-year increase in September despite the official data about the Chinese property market are not announced until early October. Moreover, there is a divergence in the property market between city tiers. The housing prices in first-tier and second-tier cities increase sharply while the housing prices in third-tier cities actually drops. However, the sales in first-tier cities fell 9% in September year-on-year. And the sales growth in second-tier cities maintained August's sales growth of 29%. The sales growth in third-tier cities recorded 31%, up from 23% in August. As the sales are measured in square meters, it does not precisely explain an accurate demand-supply relationship, but it could show some facts about the market. Such a decrease in housing sales in first-tier cities is possible to trigger a burst in the housing market bubble, but I don't think this will be the key trigger.

I think that the key trigger will happen in the banking sector. Some Chinese banks do not have strong financial positions and hold properties as part of their assets. In China, many people borrow mortgages from banks in order to buy their houses and flats. When these people have not finished paying back their mortgages, the banks are holding their properties. Once the property prices fall sharply, people may do what the Americans did in 2007 and 2008, then causing a collapse in the property market. However, there is another probability that if one bank has too many bad debts and a very high leverage ratio, it may sell the properties it holds and when the market realizes how many properties this bank holds, they may question if the banks hold most of the properties and if there is excess supply in cities, even the properties have been sold out quickly. This could drag down the property price sharply and cause a collapse of the property market.

I think the second state has a much higher probability as the prices in the Chinese property market is not very likely to fall spontaneously due to the Chinese culture, the fall of the prices has to have a trigger, and that trigger I think is from the banking sector.

What is the impact made by the oil cut this time?

The OPEC agreed to cut the production for the first time in the last eight years. The markets were surprised by such news and spiked up once the news was released. The markets had not expected the OPEC to come to any agreement, as the OPEC were very divided and Saudi Arabia previously raised its production to win a higher market share, which had caused friction within the OPEC further.

However, this is only a preliminary agreement and today's Russian production even increased by 400000. It is crucial to see the reaction from Russia to this message. If Russia agrees to cut its production, the later negotiation will be easier; if not, this agreement may be meaningless and end up nowhere closer to a final agreement. Moreover, in November, there will be another meeting about how much each country will agree to cut. This is a much tougher negotiation than having a preliminary agreement of the production cut. All countries in the OPEC want the cuts happening to them to be minimized and the cuts happening to others to be maximized in order to maximize their own market shares. The reality is some countries could gain higher market shares after the agreement and some countries may lose their current market shares; so if no country wants to make any sacrifice, the negotiation cannot end well. Therefore, I think that the difficulty of having the final agreement about the production cut is greater than expected.

If we can get a final agreement of oil production cut, there will be definitely a spike up in the energy sector once the news is released; however, the oil price will not rise back to $80 per barrel, given the green source energy is starting to replace some use of the oil and the economy is not booming and there are many economic uncertainties outstanding and some countries have stored oil as they bought more than needed when the price was low. Therefore, I see the future peak of oil price will be around 60$ and the oil price may gradually fall over time.

To conclude, I think there is a big probability that the agreement may finally fall apart and even if the final agreement about the oil production cut is made, the oil price will rise to its peak soon after the agreement and then gradually fall over time.

How bad is the idea of President Trump?

On the 26th of September, this Monday, people's attention has been drawn towards the first US presidential debate that people around the world consider the damaging impacts that may be caused to the world politics if Trump is elected, Martin Wolf even writes an article with the tile of "How the west might soon be lost"on the Financial Times (https://www.ft.com/content/804537f6-83d2-11e6-8897-2359a58ac7a5). Some people even start to compare the election of Adolf Hilter and this US election. I think that even if Trump is elected, there is a possibility of having a US president who does nothing beneficial or harm to the US as well as the rest of the world.

Firstly, when we compare Donald Trump's and Hillary Clinton's plans, Hillary Clinton has very detailed plans for domestic policies and foreign policies, but as some media claims, she does not give us a big blueprint of the US future; on the other hand, Donald Trump's slogan of "Make America Great Again" is his big blueprint of the American future, but as usual, he does not have detailed plans, though he claims they are secrets, I and many of others deeply doubt if he really has a plan. Therefore, we can assume Trump does not have a plan if he is elected.

Then when he is elected this November, which is possible, and he becomes the next US president with no detailed plans. What will he do as the US president? He does not have a lot of experience and may not even know how to exercise his power as the US president; therefore, he is forced into a position that he has to ask for help from others. His running partner is very conservative, which means he is not going to get very dangerous advice from his Vice President. He is unlikely to get any useful advice from the Democrats, so he will be dependent on the advice from the Republican party.

Now think from other Republican politicians' prospects, are they willing to give very useful advice to Donald Trump? I don't think so. Once Donald Trump was firstly pointed as the Republican nominee, he did not receive immediate support from the Republican party, which shows he is not the best option for some Republican politicians and these politicians will not endorse Trump and give him full support. In addition, what many Republican politicians consider more about is the election in four years. If they want to have their chances in the next election, they do not give Trump enough advice to make him seem successful, otherwise they will eliminate their chances to be elected in the next election. Therefore, Donald Trump is very likely to have his under-average four-year presidential term if he follows the advice given to him by his Republican colleagues.

Is Trump willing to follow the advice given to him? I don't think he has an option. From his speech, he has little political experience and faces a very complicated global political environment. People worry about his presidency because he changes his mind so often, which shows he may not know what exactly he wants to do. In this case, he is very likely to follow the advice given to him. And the Republican party will just provide enough advice to protect the nation and the party from falling apart.

Therefore, I think the presidency of Trump if he is elected will heavily depend on the support from the Republican party while the Republican party I think will not cooperate fully and give him full support. It is very likely to have no big change to the US economy and politics if Trump is elected, as the Republican party is not willing to see any good or bad change in the US.

Does the German government have the choice not to bailout Deutsch Bank?

The German Chancellor, Angela Merkel, ruled out the possibility of a bailout for Deutsche Bank. I think that it may be true for now, but is not realistic in the future. The Chancellor's claim is made based on the political reasons, as there will be an election next year and such claim could help her to win votes; however, such claim is not realistic under the current economic condition.

Previously Deutsche Bank had recovered relatively well from the Brexit crisis, because of people's belief in the central bank, in the German case, the European Central Bank, and more importantly the state. When people believe their deposits are backed by the state and the central bank, they will not be too worried when their banks have some financial struggling. There have been some reports suggesting that Deutsche Bank has a dangerously high leverage ratio and has some financial difficulties. The importance of Deutsche Bank to the German economy is significant, as the bank is the largest lender domestically.

Now it seems Deutsche Bank will not be bailed out when the time comes, then savers and investors will start to panic as they can no longer rely on the state support. This is why we see the stock price of Deutsche Bank slumps since Merkel ruled out bailout for the bank. The firms and individuals who borrow from Deutsche Bank may panic. If Deutsche Bank is forced into the position of filing bankruptcy, the debtors may need to pay back their loans earlier than their scheduled times and a rollover is definitely not an option. Then we are very likely to see more firms in Germany filing bankruptcy as the liquidity issue could become a major problem for the German economy when the biggest domestic lender is in a deep financial difficulty. Then the German government has to step in and bail out Deutsche Bank, as it is no longer a firm's individual problem, it becomes a domestic macroeconomic problem.

Therefore, I think that the German government eventually will be forced to bailout Deutsche Bank, as the bank's problem is very easy to become a national problem.

Profitability of banks

Many banks blame the ineffectiveness of the ECB's monetary policies has caused a fall in their profits; however, the Chairman of the European Central Bank, Draghi, blames that the banks should not blame the ECB but forget about their poor profitability, which is the fundamental problem.

Although great monetary policies can help to improve the banks' profitabilities, the banks' own profitabilities are key to the sustainable development of the banking industry. What determines the profitability of an ordinary firm? There are several important factors: competition, market growth, cost of production. Then we use these factors to judge our banking sectors. The competition in the banking sector varies across different parts. However, there is one common rule that larger institutions are more powerful than the smaller ones, which means the larger institutions face less competition pressure. In terms of market growth, recently the financial markets are less prosperous than before; therefore, some degree of decrease in the banks' profitability is reasonable. However the cost of production in the banking sector is much lower than that before 2008. The base rate is at the historically lowest point, and the quantitative easing programs have provided the markets with enormous hot cash inflows. From this angle, the profitability of the banking sector could increase. But if we change our angle, we could find out the cost of production actually increases. The cost of production in the banking industry also involves the market risks and the future expectations. When the market risk increases, the banks start to worry about potential losses, so instead of seeking for more profits, they tend to limit their potential losses, when more banks start to do so, the less risky financial markets will have excess demand, and then returns will drop sharply. Moreover, when the future expectations lower, the banks will start to worry and play less risky strategies which are likely to reduce profits.

Therefore, we can see that the limited banking sector growth affects the profitability growth in the banking sector; moreover, as the profitability in the banking sector is also dependent on the willingness of taking risk that when banks are willing to take high risks, they will make more profits if they succeed, and the current environment disencourages the banks to take high risks, leading to a reduction in the banks' profitabilities.

Dishonesty in the banking sector

Wells Fargo is the largest US bank by its market capitalization; however, the recent scandal showed it had been dishonest to its clients, as the bank opened more than 2 million deposit and credit-card accounts that may not have been authorized by their clients. The bank was fined 158 million dollars and the CEO of the bank has resigned from his advisory position at the Federal Reserve and the Department of Labor.

For decades, we have been trying our best to improve the banking sector. Firstly, bankers are required to follow moral and ethical regulations and most of our bankers are highly educated and pre-checked before they enter the industry. It seems these people are probably the best people we may get for our banking sector. Secondly, there are much more regulators in this sector than in other sectors, as the public and the governments realize that the banking sector has a very important position in the modern society. Thirdly, as the importance of the banking society has been generally realized, the public and the politicians have a lot of attention to this sector and the sector is not only under the watch by the regulators, but also by the general public as well. 

However, the scandals in the banking sector are mostly caused by banks' dishonest or irresponsible behaviors. Why could it happen? The banking sector is a very complex sector, which not only the outsiders cannot understand, the regulators are not able to look into every single detail in the sector. The Wells Fargo scandal is not a very complicated trick, but when the unauthorized accounts are hidden among the countless banking accounts, it is very easy to create such accounts but it takes awful a lot effort to find out these accounts. Not only the efforts are very different, but the payoffs of cheaters and watchdogs are also not at the same level, which is so obvious that there is no need for me to explain any more. 

Therefore, the complex banking networks increase the difficulty of regulations and maybe we should rejoice this scandal is fairly harmless, as we all know the banking scandals could become far more catastrophic.