China aims to end global domination of U.S. dollar

Mark O'Neill August 28, 2023 10:16

In late July, Argentina had to repay the International Monetary Fund (IMF) US$2.7 billion as part of a bailout. But it did not want to use its scarce reserves of dollars -- so it paid most of it in renminbi instead.

In 2018, China and Argentina signed a swap agreement for 70 billion yuan – it was this which allowed Argentina to access the equivalent of US$1.7 billion to repay the IMF. It did not use a single dollar from its reserves.

This was the most recent example of how an increasing number of countries and companies are making international payments in yuan and furthering China’s ambition to end the global dominance of the U.S. and the SWIFT transfer system.

“The weaponisation of the U.S. dollar has completely destroyed the national credit on which the international monetary system is based,” said Yu Yongding, a former policy adviser to the People’s Bank of China. “The security of China’s holdings has increasingly become a geopolitical issue.”

Russia’s invasion of Ukraine and the sweeping U.S. sanctions against it have made this an urgent issue. The West has frozen about US$300 billion of Russia’s foreign reserves and would like to give some – or all – of it to pay Ukraine to rebuild its country to replace the damage caused by the Russians.
If Sino-U.S. relations worsen and especially if the two sides fought a war over Taiwan, Washington would impose similar sanctions against the Chinese government, banks and individuals.

As of today, the Office of Foreign Asset Control of the U.S. Treasury has issued sanctions against more than 12,000 people. Both Iran and Russia have been banned from the SWIFT financial system.

So Beijing is encouraging the use of the renminbi as a reserve currency and one to be used to settle trade payments.

In 2022, the yuan accounted for a record 6.4 per cent of the money used as foreign reserves and international trade, against 50.5 per cent for the U.S. dollar and 21.25 per cent for the euro.

After the sanctions against it, the Russian government and individuals have become major users of the renminbi, in trade and bank deposits. Last year bilateral trade between Russia and China reached a record US$190.3 billion, up 29.3 per cent from the previous year. In March this year, individual Russians deposited 41.9 billion roubles (HK$3.5 billion) in RMB.

In April this year, to make a payment to Russia for a nuclear power plant, Bangladesh used renminbi, with U.S. dollars not an option because of the sanctions against Moscow.

China received strong support for its plan to reduce the importance of the dollar at the BRICS summit in South Africa last week. Brazilian President Luiz Inacio Lula da Silva called for settlements in local currencies rather than dollars.

His predecessor Dilma Rousseff, who now heads the New Development Bank – set up by the BRICS – in Shanghai, said that the bank aimed to make about 30 per cent of its loans in local currencies, in addition to the renminbi it already lends.

“We will issue debt in rand in lending in South Africa and do the same thing in Brazil with the real. We are going to try to either do a currency swap or issue debt. We will also lend in Indian rupees,” she said.

Many African countries would also like to use the renminbi or local currencies to make trade payments. China is Africa’s largest trading partner, with a volume of US$282 billion in 2022, an increase of 11 per cent over the year before. Nigeria and South Africa have swap agreements with China.
One reason is that, when their currencies depreciate against the dollar, African countries have to pay more for imports in dollars. They see the renminbi as more stable.

The U.S. dollar is losing its position as the dominant currency in foreign exchange reserves around the world. Its share of global reserves fell last year to 58 per cent from 73 per cent in 2001.

China is also trying to end the dominance of the SWIFT payment system, from which Iran was banned in 2012 and Russia in 2022. It has launched the Cross-Border Interbank Payment System (CIPS) as a rival to SWIFT. In 2022, total settlements on CIPS reached 97 trillion renminbi, an increase of 20 per cent over the year before.

Toppling the U.S. dollar is a mission of many years. China has started on the journey.

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Mark O'Neill

A Hong Kong-based writer, teacher and speaker.