RMB replacing USD as No1 currency globally?(01)
1. The recent trends for “de-dollarization” and the newly stepped-up progress of RMB internationalization should be viewed objectively
Recently, discussions and calls for “de-dollarization” had suddenly rippled around the world. At the BRICS summit in June 2022, Russia announced plans to develop a basket of currency based on the current currencies of BRICS member countries as one of the new reserve currency options.Then,At the end of 2022, members of the Shanghai Cooperation Organization agreed to promote reciprocal trades settled in their own currencies. Also In January 2023, Brazilian President Lula and Argentine President Fernandez stated that the two countries were studying to launch a certain type of South American universal currency. Later In April 2023, the Ministry of Foreign Affairs of India announced that India and Malaysia had agreed to use Indian Rupees for trade settlement. During the same period, the governor of the Bank of Indonesia stated that Indonesia was actively promoting the process of “de-dollarization” and the diversification of settlement currencies. Indonesia had achieved in settling with China, Japan, Malaysia and Thailand in local currency , and soon succeeded in “local currency settlement” with the Central Bank of South Korea.
In the meantime, waves of news about the sudden acceleration on the process of internationalization of the RMB also come in a flood. In September 2022, PetroChina and GazpromRussia reached an agreement, stating that 50% of the later transactions be settled in RMB and 50% in Russian Rubles. Also In December 2022, the China-Arab States Summit announced that China planned to conduct RMB settlements on oil and gas trades with GCC countries. Later In February 2023, China and Brazil signed a memorandum of cooperation to establish a RMB clearing arrangement in Brazil. In March 2023, CNOOC and France’s Total Energy completed the first RMB settlement on the trade contract of liquefied natural gas. Almost simultaneously, the Export-Import Bank of China and the National Bank of Saudi Arabia launched the first RMB loan cooperation.
Why did the movements for “de-dollarization” and currency diversification suddenly increase significantly, and the operations become more frequently recently? There are at least two major reasons behind this.
First, after the outbreak of the Russia-Ukraine conflict in February 2022, the financial sanctions imposed by the United States and its allies against Russia had exacerbated the concerns around emerging markets and developing countries about the “weaponization of the US Dollar”. Against this background, multiple parties began to devote more efforts on seeking further diversification of local currency trade settlement,as well as on reserve assets.
Second, after the outbreak of the COV19 epidemic, the Federal Reserve’s extremely loose monetary policy and the subsequent extremely steep interest rate hikes had caused negative financial spillover effects to other countries, forcing the latter to find ways to reduce their excessive exposure to the US Dollar.In other words, although some challengers emerged in history attempted to sway USD dominant position in world financial system, however, the double impacts of the COV19 epidemic and the conflict between Russia and Ukraine, had in fact accelerated the “de-dollarization” paces launched by multiple countries in various forms, on a global scale.
However, history repeatedly told us that, it was always too opinionated to overestimate the speed of evolution related to the power shifting process of major reserve currencies in the global market. For example, when the U.S. economy surpassed the U.K. thus becoming the world’s largest economy, the US Dollar had still taken approximately another 50 years to finally replace the British Pound to become the world’s largest currency. As for now, China’s economic aggregated GDP was still about 78.55% of US, though seeing quite a rapid shrinking trend in the last 10 years.In addition, some opinions on social media have mis-interpreted the marginal progress of RMB internationalization. For example, recently, China-Pakistan and China-France only began to use RMB for pricing and settlement (just incremental attempts), instead of using RMB to replace the US Dollar for all bilateral settlements (not total replacements). What is even more worrying is that if these false amateurish reports was made used by some American politicians with ulterior motives, it may largely become a geopolitical excuse to push the US government to strengthen financial sanctions against China.
In fact, the longer time one currency became the global reserve currency, the stronger the world’s dependence on the usage of the very currency (institutional inertia); in return, the scale effect and settlement convenience brought by the wide adoption of the same currency (network positive externalities) ) got even higher. Unless the reserve currency issuing country itself sunk into a protracted war or crisis, or prolonged geopolitical conflicts coerced other countries to choose brand new reserve currencies, the gradually altering process on the status of global reserve currencies had often happened very slowly in history. Although the outbreak of the Russia-Ukraine conflict constituted a major geopolitical conflict to a certain extent, the decline of the dollar’s status still would be a slow process because the US Dollar not yet encountered a comparable opponent (including the Euro). Of course, this does not mean that other countries cannot plan and promote the international use of their currencies in a timely manner.
