Threat to the dollar

Threat to the dollar

Dmitry Ermakov

Western companies are leaving Russia, which means that trade with China will expand. Several domestic banks have already offered customers to open accounts in Chinese currency. The Chinese economy is one of the largest in the world. Is the yuan able to compete with the dollar in the global financial system – in the material RIA Novosti.
One yuan one way
Back in 2019, Moscow and Beijing decided to abandon dollar settlements. But those were intentions at the time: China’s banks did not get rid of the US currency. Nevertheless, the two countries have taken the first steps towards linking electronic payment systems.
Now the Chinese Foreign Ministry has again raised the topic of switching trade with Russia to rubles – or yuan. It’s only about energy sources. The PRC is promoting the same strategy in Southeast Asia and with the Arab countries. For example, Saudi Arabia, dissatisfied with Washington’s policies, calls the dollar a “black hole”. Therefore, Riyadh and Beijing are already discussing a change in the settlement currency, Wang Zaibang, a senior researcher at the Taihe analytical center, told RIA Novosti. The Wall Street Journal also wrote about the talks.
Credit organizations in Russia and Belarus are also thinking about switching from Western currencies. VTB, the only Russian bank with a license to conduct operations in China, together with Alfa-Bank, are offering Russians to open accounts and deposits in yuan. March turnover of VTB on transactions with Chinese currency amounted to 960 million rubles, which is 21 times higher than in February.
The Central Bank recalled that in recent years it has increased the share of gold and the Chinese yuan to almost half of the reserves. The Belarusian Currency and Stock Exchange announced the start of operations with the yuan. The first auctions have already taken place.
Fifth place
China announced its am-bitions to promote the yuan ten years ago. And he has had some success. Howe-ver, even according to Ch-inese analysts, neither Wes-tern sanctions nor other c-onsequences of the special operation in Ukraine will lead to a change in the w-orld order in the foreign ex-change market. Real succ-ess will come to the renm-inbi (“people’s money”, the official name of the Chin-ese currency unit) only in t-he case of fundamental ref-orms of the financial structures of China, writes the South China Morning Post.
And yet overseas rivals are watching Beijing’s mo-ves with apprehension. US Federal Reserve Chairman Jerome Powell said the Ukrainian events could “change the financial trajectory” of China. Earlier, according to the speaker, Beijing was heading towards isolation from the global monetary system, and now it can take advantage of the situation and start expanding the yuan.
There are grounds for such concerns. According to the IMF, the world’s central banks hold the equivalent of $319 billion in yuan. In the context of the global economy, this is not so much: about 2.5% of total reserves. For comparison, more than half is stored in dollars, and 19% in euros. At the same time, the renminbi is the world’s fifth largest reserve currency.
Its share has increased dramatically since 2016, when the yuan received IMF approval. Do not forget about China’s large-scale infrastructure project “One Belt – One Road”. In parallel with this, the volume of the dollar as a reserve currency is falling – in 2007 it was almost 70%.
At the same time, as Bloomberg noted at the beginning of the year, the yuan reached the fourth position in the international payments market. For comparison: in 2010, he was ranked 35th.
Now the renminbi is used as a reserve currency in approximately 75 countries around the world, Vladislav Petlenko, investment director at Sigma Global Management, told RIA Novosti. The yuan is already traded directly between China, Australia and Japan. That is, the expert recalls, both countries do not need US dollars for deals with China.
A similar opinion is shared by analysts in the Middle East. “Russia will pave the way for China’s control of the world,” Abd al-Moneim Sayyid, a former adviser to the Emir of Qatar, said in the Egyptian newspaper Al-Ahram. In his opinion, it is the yuan that will become the new international currency, because the PRC has a strong economy and the republic produces everything – “from a needle to a rocket.”
The policy of the West only pushes the Russian Federation to trade with Asian countries, and first of all with oil and gas. And this applies not only to China. For example, India and Russia are discussing the creation of a settlement mechanism in national currencies, the Mint newspaper reported, citing a source in the Indian government. Local exporters will be able to get paid in rupees instead of dollars and euros.
Threat to the dollar
One way or another, Russia and China in the current circumstances will increase the volume of trade. Moscow has virtually no other way: the US and its allies have frozen half of Russia’s foreign exchange reserves, banned transactions with the Central Bank and blocked several key banks from accessing SWIFT.
China is one of the largest foreign holders of Russia’s foreign exchange reserves. He has 13.8% of their number, equivalent to $630 billion. In addition, Beijing is Moscow’s main trading partner. The volume of transactions between the two countries exceeded $148 billion last year.
However, on some important issues – for example, the supply of parts for aircraft – Beijing has so far taken a wait-and-see attitude. Reuters wrote that China allegedly recommended that its four largest oil and gas companies reduce their participation in Russian projects. But the Chinese Foreign Ministry denied this.
At the same time, Washington continues to intimidate Beijing with punishment for circumventing sanctions against Moscow. US Secretary of Commerce Gina Raimondo has threatened to cut off Chinese semiconductor makers from access to US hardware and software.
A tool to circumvent sanctions could be the digital yuan, officially launched in February. Like other electronic currencies, it allows you to bypass some bank checks for compliance with the list of sanctioned goods.
In Washington, the launch of the digital renminbi has caused alarm: the electronic dollar is still in development. The US Central Bank said that at this rate, the dollar’s international dominance could be shaken. Moreover, the euro comes on the heels of the American currency. According to SWIFT, in December 2021, the dollar accounted for 40.5% of global payments, while the euro accounted for 36.7%.
“China has nowhere to develop territorial expansion, except for Taiwan. But economic expansion is open,” says Andrey Plotnikov, an international financial analyst. “Plus, the digital yuan can really help Russia solve many economic issues and work around sanctions.”
Long term
The relative unpopularity of the yuan in international settlements is explained by the desire of the Chinese authorities to regulate the exchange rate, experts say. “A currency that is not fully convertible gives the country the opportunity to better control the situation on the domestic market and easily adapt to external duties and sanctions. In other words, the PRC strictly monitors the outflow of capital,” explains Ivan Belkin, CEO of Label Home Inc.
However, for Russians, the yuan looks like a promising currency: China is one of the few countries that opposed the disconnection of Russian banks from the SWIFT system.
“The strengthening of the yuan in China’s foreign trade with Russia will depend on the volume of redirected Russian raw material exports that China is ready to accept. For example, China has its own large-scale production in the metallurgical industry,” points out Vladislav Petlenko. “China buys little oil from Russia. But it is possible that Beijing will agree to increase volumes if Russian suppliers lower prices.”
At the same time, experts believe that today the Russians should buy the yuan. “In the long run, this is a risky investment, but quick speculation and medium-term investments can not only save, but also increase funds,” Ivan Belkin points out.
Keeping the yuan in the investment portfolio is more and more profitable in the current situation, Vladislav Petlenko also agrees.
However, the Chinese economy is poorly diversified. “The yuan still lacks international liquidity. For a long time, it was beneficial for Beijing to maintain a cheap national currency due to the huge volume of exports of goods valued in US dollars,” says Vladislav Petlenko. US dollar and other well-known world currencies”.
Until this happens, the increasing role of Chinese companies in the world market will lead to a depreciation of the renminbi. This means that the Russians still have the risk of losing some money when buying yuan – at least in the short term. As for the role of the Chinese currency in foreign trade with Russia, much depends on the desire and, most importantly, the ability of Beijing to play a game independent of the West.

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