China - United States - Europe De-dollarization: upheaval or slogan?
The battle for de-dollarization: A challenge for the Chinese currency
China has gone on the attack against the hegemony of the dollar, announcing "de-dollarization". It denounces the management of the dollar, the international currency of exchange since the Bretton Woods agreement, to the sole benefit of the United States, and even more so its weaponization, with Washington refusing to use the dollar for trade with countries that undermine human rights, the economy and world security. For many countries, it has become vital to find a substitute for the dollar, and the renminbi has emerged as the only possible substitute. Yet China's currency is unable to establish itself as an international currency, as it remains too tightly controlled by pusillanimous government authorities who filter the country's yuan in and out. American financial circles can therefore breathe easy: "de-dollarization" is still little more than a slogan, and the dollar remains king.
Fed: Federal Reserve System
SCO: The Shanghai Cooperation Organization (SCO) was created in 2001 by China, Russia and four Central Asian countries: Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. It gradually expanded to include India and Pakistan in 2016, and Iran in 2021. Mongolia, Belarus and Afghanistan are observer members.
SWIFT: Society for Worldwide Interbank Financial Telecommunication - A messaging network enabling banks to send and receive information electronically, the system was created to standardize and secure international transfers.
Weaponization: militarization
On February 20, 2023, the article US Hegemony and Its Perils, with its chapter on "Economic Hegemony: Plunder and Exploitation", marked the start of a series of articles revolving around the concept of "de-dollarization".
The Chinese attack
At Bretton Woods, the victors of the Second World War, the United States created a monetary system based on the gold-indexed US dollar. It was a welcome development, enabling international trade to flourish and making the dollar a reserve currency alongside gold. But it was a system that President Richard Nixon distorted on August 15, 1971, when he announced the end of the dollar's convertibility. From then on, America could create money with impunity to make up the federal deficit, with this liquidity being absorbed by the international community, to ensure growing trade or to bolster the financial reserves of the States1 . As Charles de Gaulle lamented over half a century ago, the United States enjoys an "exorbitant privilege" and a "tearless deficit" created by its dollar. And they can use their worthless banknote to plunder the resources and factories of other nations.
Dollar manipulation
As an international currency, a reserve currency that guarantees the monetary guarantor of the States, the dollar should be managed like a "father of the family". This has never been the case. Very recently, during the COVID-19 pandemic, the United States was able to inject trillions of dollars into the market to support its economy, pushing global inflation to a 40-year high, leaving other countries, particularly emerging economies, to pay the price. In 2022, all of a sudden, the Fed* turned to aggressively raising interest rates, causing all currencies to depreciate substantially. Some, like the euro, fell to their lowest level in 20 years. The dollar thus became the main source of instability and uncertainty in the global economy2 .
But that's not the only abuse.
The dollar militarized, misused
The United States has turned the dollar into a geopolitical weapon. The U.S. Department of Justice has enacted a series of laws prohibiting the use of the dollar in trade with countries which, according to Washington, undermine human rights, the economy and global security. A law and long-range extraterritorial sanctions that are used constantly. The Trump administration has issued over 3,900 sanctions, an average of three a day. In all, nearly 40 countries have been targeted: Cuba, China, Russia, North Korea, Iran, Venezuela... and even France.
Another class of sanctions was the confiscation of foreign exchange reserves in US banks. Thus, after the withdrawal of American troops, Afghanistan's reserves were frozen. The same applied to Russian reserves. Even more inconveniently, the country's banks were banned from the global interbank system, SWIFT*3 .
The dollar sanctioned, de-dollarization
For many countries directly or indirectly impacted by the American bans, it was vital to find a substitute for the dollar, and the renminbi appeared to be the only possible substitute. China has seized this opportunity to push the yuan internationally. After meeting the expectations of Russia and Iran, Beijing turned its attention to the Middle East. Xi Jinping's visit to Saudi Arabia in December 2022 gave birth to the "petro-yuan", and in February, Iraq's central bank announced that it would allow trade with China to be settled in yuan. At the same time, members of the Shanghai Cooperation Organization (SCO* ) carried out their first yuan transactions4 .
More fundamentally, countries such as India, Argentina and Brazil are quietly moving away from exclusive reliance on the dollar. Luiz Lula da Silva's Brazilian central bank has made the yuan the second currency in its monetary reserves, ahead of the euro. In April, Bangladesh agreed to pay the equivalent of $318 million to Russia in renminbi for the construction of a nuclear power plant. What's more, Europe buys Russian liquefied natural gas in yuan through the China National Offshore Oil Corporation!
American denials
Nevertheless, the dollar remains the world's leading currency, accounting for 60% of foreign exchange reserves and 40% of international payments. It remains a universal benchmark, since the price of oil and the main commodities on international stock exchanges is always set in dollars.
- Attacks on the dollar's hegemony are of little concern to American financial circles. They have no effect on their main partners, who shelter under the military protection of the United States, whether European nations or Asia-Pacific countries worried by China.
- Their impact is marginal, with the yuan contributing barely 3% to global financial flows, far behind the euro.
- They're not worried, since they don't imagine that U.S. financial sanctions will have any impact on the confidence that third countries may retain in the dollar.
Aren't they just being reckless? There are only a few wrinkles in the financial space, because so far China's stifling legislation has restricted its capital markets. It could be otherwise.
But only if Beijing, which still tightly controls the inflow and outflow of money into and out of the country, resolves to give greater freedom to its currency and to investments at home and abroad. Today, the yuan is not fully convertible, and its use in areas such as cross-border lending and portfolio investment is subject to restrictions. Another factor is the poor transparency of China's financial markets. All these factors prevent China from having the free and powerful financial market it needs to make the yuan a leading global currency. The renminbi could then become more than just a technical currency, just a means of payment5 .
De-dollarization is still just a slogan
Today, however, there seems to be no sign of the legislation being called into question. Articles in the Chinese press do not go beyond denouncing the hegemony of the dollar and its weaponization* . Clearly, the Chinese Communist Party is not about to embark on the unknown. When will it have the courage? For the time being, de-dollarization seems to remain no more than a slogan.
However, the United States is not immune to disruption. The artificial creation of currency, which they abuse, will eventually be difficult to absorb. A negative cycle could begin, with the dollar losing its value over the long term, leaving room on the international market for other currencies, thus losing even more of its attractiveness.
And what about de-dollarization? The President of the European Central Bank, Christine Lagarde, gives us an answer when she notes: "A new world map is taking shape, with some countries seeking alternative billing currencies, such as the Chinese renminbi or the Indian rupee, accumulating gold." However, these developments remain modest and do not point to an imminent loss of the US dollar's predominance. So far, there have been no substantial changes in the use of international currencies. For the time being, de-dollarization is no more than a slogan. The fact remains, however, that if the United States is cautious, it should not take the undisputed status of its currency for granted.
EV
Sources
- US Hegemony and Its Perils; China's Ministry of Foreign affairs, 20/02/2023.
- Dollar hegemony creates chaos; China Daily, 08/04/2023.
- Sanctions are the new global hegemony; Gateway House, 03/03/2022.
- The Bid to Dethrone the Dollar; FP, 12/05/2023
- The Chinese Yuan could finally become a fierce competitor for the US dollar; Fortune, 01/06/2023
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