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China and De-dollarization – Part 3 – Trade Agreements

Part 03 - Trade Agreements

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This Week's Topics

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DE-DOLLARIZATION - PART 03

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As the multi-polar Global South movement accelerates, there is now a consensus that the time is right for strategic alternatives – banks, financial messaging systems, and possibly even a new currency. In this Part 03, we examine recent changes to the financial infrastructure proliferating amongst BRICS+ and SCO+ members.

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Marketing Dept

info@novalogix.io

www.novalogix.io

2023-05-02

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Executive Summary

Overview

In Parts 01 and 02 of our 4-part series on China and De-dollarization, we examined the historical origins and structure of the BRICS, SCO, and EAEU, which we collectively refer to as the Global South Organizations (“GSO”).

This Part 03 examines GSO trade agreements in greater detail to provide the reader with a sense of the scale of alternatives to USD-denominated international trading:

Strategic Initiatives – these include development funds, trade settlement schemes, messaging systems, and currency agreements that have the potential to fundamentally change the trajectory of de-dollarization. The BRICS’ proposed new currency is one such strategic initiative.
Tactical Initiatives – these include trade and currency swaps agreements, typically negotiated between two or more countries for a narrow range of products and services in named industrial sectors. The 27-year LNG agreement signed by China and Qatar in November 2022 in an example of a tactical initiative.

There are many reasons why the USD is the world’s de facto reserve currency – it’s scalable, stable, and ubiquitous. While conceptually appealing to GSO members, alternative financial systems, tools, and currencies face daunting implementation challenges. In this Part 03, we also assess common political, economic, and regulatory bottlenecks that have hindered the pivot away from the USD.

Strategic Initiatives

The World Bank, IMF, SWIFT, and CHIPS comprise the core financial infrastructures supporting the USD’s role as the world’s de facto reserve currency. The GSO, and in particular, China and Russia, have been developing enabling infrastructures to facilitate de-dollarization, or least mitigate the risks of dollar dependency.

New Development Bank (NDB)

While it will take some time to scale up the funding levels available through the World Bank ($329 billion in total assets), the New Development Bank (NDB), created by the BRICS in 2014, is chartered with providing favorable infrastructure project loans to BRICS members.

Asia Infrastructure Investment Bank (AIIB)

The Asian Infrastructure Investment Bank (AIIB), like the New Development Bank, is a multilateral development bank that was established in 2014 to finance regional infrastructure and sustainable development projects. With $100 billion in working capital, it is the largest development bank focused on the extended Asian market, second in size only to the World Bank.

Common Objectives

Both the NDB and AIIB serve multiple functions:

They facilitate economic development in their respective markets, presumably with terms that are competitive relative to the World Bank.
Both banks provide loans in RMB and other local currencies, which furthers Beijing’s objective of de-dollarizing international trade.
To the extent that loans are made in RMB, this also furthers Beijing’s goal of establishing it (the RMB) as an accepted reserve currency.
Unlike the IMF, neither bank imposes harsh “conditionalities”, which usually tie radical socio-economic restructuring, such as privatization, to loans they provide.

SWIFT Alternatives

Both China and Russia have had a long-standing interest in reducing their exposure to the West’s financial infrastructure – the US government threatened to disconnect the Russian Federation from the SWIFT financial messaging system as early as 2014.

But the US sanctions against Russian banks and SWIFT customers in 2022 drove home the reality that the US and its allies are willing to economically isolate their enemies by blocking access to global financial systems.

Although both China and Russia began developing sophisticated business continuity plans long before the 2022 Russo-Ukrainian War, the US-EU sanctions against Russian commercial interests triggered an urgent effort to implement the alternative systems described below.

Alternative Currency Models

Ultimately, if China and its trading partners truly want to “de-dollarize” cross-border trading, then one or more viable alternative currency models need to be identified. In fact, one of the main reasons that the USD has been the dominant trade settlement and reserve currency for the last 50 years is that an alternative hasn’t emerged that can compete with its scalability, convertibility and stability.

In this analysis, we examine several approaches that have been considered by China, Russia, and the collective BRICS and SCO members:

We cannot dictate the foreign, economic, and energy policies of every major power in the world. In order to even try to do that, we would have to sanction, for example, some of the world's largest banks. We'd have to cut off countries like China from the American financial system.

And since they happen to be major purchasers of our debt, such actions could trigger severe disruptions in our own economy...and, by the way, raise questions internationally about the dollar's role as the world's reserver currency.
President Obama, 2015 Tweet

Alternative Currency Models - Options

Local Currencies – many of the tactical trade agreements discussed below are premised on settling cross-border transactions in local currencies.

New Currency – the “bric” is a potential new currency for cross-border trade by BRICS member countries proposed by Russia’s State Duma. It is on the agenda for the 15th BRICS Summit to be held in August 2023 in South Africa. The argument for the bric is that, while any one BRICS currency may be inferior to the USD, the collective economic footprint of the BRICS countries is not only greater than that of the US, but it’s already greater than the collective G7 countries – as of 2022, the BRICS accounted for 31.5% of the world’s GDP, while the G7 only accounted for 30.0%.

Commodity-backed Currency (Russia) – as a result of sanctions imposed on it by the US and western allies, Russia has publicly considered the possibility of a commodity-backed currency – specifically, pegging the RUB to oil and/or gold. It’s worth noting that Russia and China each produce 11% of the world’s gold output, and Russia produces more oil than any country other than the US. If Russia were to implement this model, it could create the perception (and reality) that the RUB is more legitimate than the USD.

Commodity-backed Currency (China) – while China hasn’t explicitly declared its intent to convert the RMB to a commodity-backed currency, it has introduced the Shanghai Petroleum and Natural Gas Exchange (SHPGX) in 2018 to promote the development of China’s oil and gas market and to improve the efficiency of the country’s energy trading system. Notably the SHPGX allows sellers to be paid in either RMB or gold – this arrangement effectively makes the RMB a commodity-backed currency.

Collectively, the proposed bric, Russia’s potential conversion to a commodity-backed RUB, and China’s SHPGX have the potential to disrupt the USD’s role as the world’s trade settlement and reserve currency:

The bric, once implemented, will substantially reduce the demand for dollars (as a percentage of total global demand), although any new currency will take at least a decade to implement.
There has been much debate recently regarding the risks of using fiat currency, and the ability (willingness) of the US’ trading partners to effectively absorb the inflationary impact of ever-growing US budget deficits. Russia’s proposed commodity-backed currency and China’s SHGPX stand in stark contrast to the US fiat currency model and could eventually undermine faith in the USD.

Tactical Initiatives

A growing number of BRICS, SCO and other GSO countries have negotiated one-off agreements to encourage bilateral trade and investment using local currencies.

Any one of these agreement poses no threat to the USD’s standing in global commerce. But in the aggregate, the growing number of agreements, and their collective value, cannot be ignored – with or without strategic agreements sponsored by the BRICS, SCO or EAEU, more and more countries are abandoning the USD for cross-border trade.

Swaps contracts hedge potential risks associated with currency exchange rate fluctuations that can undermine effectiveness of trade agreements, an issue common to the GSO.

Issues

The de-dollarization movement has not been without its share of challenges.

Until the advent of the BRICS, SCO, and EAEU, there wasn’t a forum where the GSO countries could even discuss their concerns regarding dollar hegemony. Although the BRICS and SCO were both (informally) established more than 20 years ago, organized currency policies have only gained momentum in the last few years.

Whereas the USD has had the advantage of stability and ubiquitousness, the nature of emerging markets in the Global South has meant that trading partners have had to use the USD for cross-border trading.

Incompatible financial systems, inefficient customs procedures, inadequate port facilities, and incompatible railway systems are just a few of the infrastructure challenges that need to be resolved in conjunction with trade settlement systems.

Conclusion

Has the de-dollarization movement in the Global South reached a critical mass that spells the demise of the USD in the 31.5% of the world’s GDP controlled by BRICS and the SCO? It’s unlikely that the USD will be unseated in the near future. But the unmistakable trend is toward a hybrid model that opportunistically uses local currencies whenever possible.

Once again, we’d like to point out that the real significance of de-dollarization is not an economic one. Rather, the political power accorded to the US because of USD hegemony is now at risk – this is not a hypothetical threat, as has been demonstrated by Russia’s (and other countries’) ability to circumvent the 2022 sanctions linked to the Russo-Ukrainian War. To the extent that GSO members can decouple their economic behaviors from the shadow of the USD, they can similarly disassociate themselves from the influence of US foreign policy.

Development Banks

New Development Bank (NDB)

In 2014, the BRICS nations established the New Development Bank (NDB), formerly known as the BRICS Development Bank, as a multilateral development bank to finance infrastructure and sustainable development projects in member countries and other developing nations. The NDB, as well as China’s Asian Infrastructure Investment Bank (see below), make it possible to sidestep the IMF and its somewhat hegemonic “conditionalities” for loans.

Established in 2014, the New Development Bank (NDB) is a multilateral development bank initiated by the BRICS nations with the primary aim of financing infrastructure and sustainable development projects in member countries and other developing nations. The NDB, along with China’s Asian Infrastructure Investment Bank, offers an alternative to the International Monetary Fund (IMF) and its associated conditionalities for loans.

The NDB primarily funds sustainable development projects that include clean energy, transport infrastructure, water, environmental protection, and social and digital infrastructure.

The NDB operating model differs from the World Bank and IMF in two key respects:

It supports de-dollarization by promoting the use of local currencies in its operations. By providing loans and facilitating settlements in the currencies of its member countries, the NDB reduces dependency on the US dollar, mitigates currency risk, and fosters greater financial stability in the Global South.
It does not impose “conditionalities” on loan recipients. The IMF has a history of tying loans to so-called conditionalities that frequently force borrowing countries to privatize services such as electric and water utilities, which in turn results in massive increases in consumer prices. These policies have earned it a reputation as a kind of predatory lender (in partnership with the World Bank, who is the party that actually provides the funding for loans).

NDB Loans vs World Bank - 2014 - 2022

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NDB Loans vs World Bank - 2014 - 2022 (billions)

Data Source – NDB, World Bank

Asian Infrastructure Investment Bank (AIIB)

Unlike the NDB, the AIIB is not formally affiliated with either the BRICS or SCO – because of this, it supports countries outside the rosters of the BRICS and SCO. It is a China-led initiative, originally proposed by President Xi Jinping and headquartered in Beijing, but with an international management team. While NDB members all have equal voting rights, AIIB’s voting rights are pegged to capital contribution – at 26.6%, China is the largest shareholder and intentionally has the greatest influence on the bank’s direction, reflecting China’s concern that the World Bank and IMF are dominated by western interests.

The AIIB is a key financial supporter of the Belt and Road Initiative (BRI), funding infrastructure projects in many BRI partner countries. This aligns with China’s broader foreign policy objectives of expanding its global influence and fostering regional economic interdependence.

More importantly, it is closely aligned with Beijing’s strategy to promote the CNY in lieu of the USD vis-à-vis loans denominated in CNY and other local currencies.

The use of local currencies reduces exposure to exchange rate risks associated with USD-denominated loans, especially for countries with volatile currencies. This makes the AIIB’s loans more attractive, thereby enhancing China’s influence in these countries.

By providing loans in CNY and other local currencies, the AIIB also encourages their use in international trade, further supporting China’s long-term strategy to establish the CNY as an alternative global reserve currency.

AIIB Loans vs World Bank - 2014 - 2022

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AIIB Loans vs World Bank - 2014 - 2022 (billions)

Data Source – AIIB, World Bank

Financial Systems

Overview

This sub-section examines the SWIFT system, potential and realized risks for Russia and China, and the alternative financial messaging systems in development to mitigate those risks.

SWIFT

Founded in 1973 and headquartered in Belgium, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a global member-owned cooperative providing secure messaging services that enable financial institutions worldwide to send and receive financial transaction data in a secure, standardized, and reliable environment. Note – SWIFT is not a payments system – it sends payment requests that are usually executed by correspondent banks.

SWIFT’s services are used by more than 11,000 financial institutions in over 200 countries and territories. It is estimated that SWIFT currently handles over 8.4 billion transactions per year, with a notional value of $150 trillion. This makes it a crucial part of the global financial infrastructure, facilitating vast amounts of international trade and commerce.

Exposure to SWIFT (Russia)

The SWIFT sanctions imposed on Russia in 2022 due to the Russo-Ukrainian War have had significant economic implications. The sanctions targeted specific Russian banks, effectively freezing their ability to transact with the rest of the world. This has not only impeded these banks from executing their own and their customers’ financial transactions with foreign entities but also disrupted Russia’s domestic payment system to some extent.

The immediate economic impact on Russia was severe. The announcement of the SWIFT sanctions, combined with the actual freezing of the Russian Central Bank’s foreign assets on February 28, led to a sharp depreciation of the ruble by about 30 percent (which has since partially recovered). The central bank was forced to double interest rates to 20 percent and impose controls on payments abroad.

Russia’s domestic payment system was also disrupted, since all major credit card networks (VISA, Mastercard, Amex, etc.) all operate through SWIFT. This triggered a run on banks, with close to 1 trillion RUB (6.5% of the money supply) withdrawn after sanctions were announced.

As we’ve noted in other research papers, the sanctions have had unintended consequences for other European countries, notably in disruptions to energy, grain, and other commodities, as well as the risk of debt defaults – more than $100 billion payments tied to outstanding Russian debt will come due in 2023.

Exposure to SWIFT (China)

As of 2022, China accounts for an estimated 30% of total global traffic SWIFT – the sheer volume of transactions involving China within the SWIFT system is staggering. China’s portion of total SWIFT traffic in 2022 was approximately 2.52 billion transactions, representing a notional value in the range of $45 trillion.

In 2022, China’s international trade represented approximately 20% of its total GDP, underscoring its dependence on global markets for economic growth.

As we will see in this report, the dual dependency between China and the global economy is a critical factor with respect to any plans for de-dollarization trend. Whereas the US felt Russia could be painlessly excised from SWIFT, the same logic cannot be applied to China in the event of a major conflict, such as a war over Taiwan – similarly, China cannot wholesale abandon the USD as either a trade settlement or reserve currency.

The recent tensions between the United States and China bring this hypothetical situation into sharper focus. While the US has not threatened to disconnect China from the SWIFT system, recent sanctions imposed on China’s semiconductor sector, as well as saber-rattling over the Taiwan issue by both US and Chinese politicians suggest that actions similar to those imposed against Russia are no longer unthinkable.

Both Russia and China have been well aware of their exposure to a global financial system dominated by the US.

SPFS – System for Transfer of Financial Messages

SPFS is the Russian alternative to SWIFT. First announced in 2014 by the Central Bank of Russia, it was finally deployed In December 2017 with a limited number of domestic Russian banks, but has steadily expanded to include Armenia, Belarus, China, India, Iran, Kazakhstan, Kyrgyzstan, Serbia, Switzerland, and Vietnam, Turkey, and Egypt.

SFPS is not an end-to-end solution – it is only a messaging system. Payments must be processed separately – domestically, that can be handled by Russia’s National Payment System (NSPK), while international payments can be processed by inter-operating with SWIFT.

While not nearly the same scale as SWIFT, SPFS has reached critical mass as an alternative international financial messaging network, processing approximately 1.7 billion messages in 2022, up from 629 million messages in 2021. The total value of transactions processed through SPFS in 2022 was $58 trillion, up from $23 trillion in 2021.

The impetus for SPFS’ development was the US threat in to cut off Russia’s access to SWIFT after Russia invaded Crimea in 2014. And in fact, the US and its EU allies made good on their threat after Russia invaded Ukraine in 2022.

From the perspective of de-dollarization, SPFS serves two functions:

It enables Russia and other members of the GSO to conduct trade independent of any western allies’ sanctions – the fact that SPFS was operational before the start of the Russo-Ukrainian War severely weakened the impact of US sanctions by enabling Russia to (near) seamlessly pivot to East Asian markets for its commodities exports.
More importantly, it facilitates the use of local currencies and, if Russia succeeds with its proposed “new currency”, deploying such a currency would be far simpler SPFS than with SWIFT.

CIPS - Cross-Border Interbank Payment System

CIPS is a real-time gross settlement (payment) system offering clearing and settlement services that was developed by China and launched in 2015. While it is ostensibly an international system whose shareholders include HSBC, Standard Chartered, Citibank, and BNP Paribas (among others), it was developed by the People’s Bank of China, which holds 51% stake in CIPS.

Trading volume processed by CIPS has grown dramatically since its first full year of operations – 2.3 trillion transactions worth $3.8 trillion in 2016 to 7.6 trillion transactions worth $12.9 trillion in 2022.

CIPS - Annual Transaction Volume - 2016 - 2022

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CIPS - Annual Transaction Volume - 2016 - 2022 (trillions)

Data Source – CIPS, Caixin

CIPS - Issues

CIPS is a key part of China’s strategy to internationalize the renminbi (RMB) and displace the USD as the default trade settlement and reserve currency for countries with which it has an import/export relationship – a key impediment to achieving this objective has simply been the ability to process payments in RMB.

CIPS is a relatively new system, and as such, there are still outstanding issues that continue to constrain its growth:

Limited Access: CIPS is only available to member banks that are members of the system – of the 1437 member banks (as of 2023), only 80 are direct participants who process payments directly. The remaining 1,357 participants must process payments through the direct members.
High Fees: The fees charged by CIPS are still relatively high.
Complexities: CIPS is complex, making it difficult to understand how to use the system.
Lack of Transparency: CIPS is not very transparent, making it difficult to track transactions.

Nevertheless, CIPS is considered a success and an enabling technology for proponents of de-dollarization.

Alternative Currency Models

Overview

For slightly different reasons, both Russia and China have been promoting their respective currencies as an alternative to the USD:

As a result of the Russo-Ukrainian War, an estimated $300 billion dollars of Russian assets have been confiscated by western countries – $150 billion in cash and US Treasuries, and $150 billion in other liquid and non-liquid assets. The best way to mitigate the risk of another seizure is to simply avoid trading with dollars, which reduces the USD needed in its currency reserves.
Although China’s assets have not (yet) been confiscated, the specter of a war over Taiwan poses the risk that a similar fate may befall China. And of China’s $3.1 trillion in total foreign currency reserves (as of Q1 2023), an estimated $800 billion is in the form of USD and/or US Treasuries. To the extent that the USD may be subject to devaluation as a result of US government budget deficits and/or inflation, China may be concerned with such a sizable exposure.

RMB as Trade Settlement Currency – Concerns

There are several issues with using the CNY as a trade settlement currency that impact its use for cross-border transactions:

Limited Convertibility: The CNY is not fully convertible and cannot be freely traded on foreign currency exchanges.
Capital Controls: China maintains strict capital controls, which limit the flow of money in and out of the country.
Political Risk: China’s one-party state poses a “rule-of-law”, or lack thereof, risk.
Currency Volatility: Critics charge that the CNY has been a relatively volatile currency – conversely, another concern is that China artificially controls the exchange rate.

Despite these concerns, the use of the CNY as a trade settlement currency has steadily increased (as a percent of total cross-border transactions) from 0.2% in 2010 to 3.0% in 2022.

Basket of Currencies

While there has been no specific proposal, China and Russia have at times expressed interest in using a basket of currencies as the basis for cross-border trade settlement for GSO countries.

In theory, a basket of currencies would be composed of the respective member country currencies in the BRICS and SCO, weighted based on the economic importance of each currency. When a basket of currencies is used to settle cross-border trade, the buyer and seller agree on a price in terms of the basket of currencies. The buyer then pays the seller the agreed-upon price in the basket of currencies. The seller then converts the basket of currencies into their local currency.

The primary benefit of such a model is that the currency basket tends to have reduced currency fluctuations than the individual currencies (of which it is comprised), thereby making pricing of non-USD transactions easier to set and more predictable.

To date, neither the BRICS nor the SCO have formally proposed currency basket for their respective members.

Local Currencies

Many of the tactical trade agreements discussed below are premised on settling cross-border transactions in local currencies.

New Currency

There has been discussion of an entirely new currency for the BRICS, tentatively dubbed the “bric”, that will be on the agenda for the 15^th BRICS Summit to be held in August 2023 in South Africa. This would be a significant departure from trade settlement models based on either the USD or local currencies.

The bric is a proposed new currency for cross-border trade by BRICS member countries proposed by Alexander Babakov, the deputy chairman of Russia’s State Duma. It is on the agenda for the 15^th BRICS Summit to be held in August 2023 in South Africa.

The bric concept originated from a collective desire by the BRICS members free themselves from the so-called “dollar hegemony”, especially when conducting cross-border trade. It challenges the narrative that the USD outperforms BRICS’ currencies in terms of scalability, stability and currency-conversion costs.

New Currency - Benefits

The argument for the bric is that, while any one BRICS currency may be inferior to the USD, the collective economic footprint of the BRICS countries is not only greater than that of the US, but it’s already greater than the collective G7 countries – as of 2022, the BRICS accounted for 31.5% of the world’s GDP, while the G7 only accounted for 30.0%.

The creation of the bric would be a major departure from trade settlement models based on either the USD or local currencies.

As noted above, the key selling point of the bric is escape from dollar hegemony – by using the bric for international trade, the BRICS would achieve a level of self-sufficiency that has eluded the world’s other currency unions.

In addition, the bric could be extended to other countries wishing to trade with the BRICS. Given that each BRICS nation is an economic heavyweight in its region, it is expected that countries worldwide would be willing to trade in the bric.

An unspoken third benefit would be the detrimental impact on US and its allies’ sanctions imposed on Russia, China, and any other opponent of western foreign policy. As GSO countries become more financially autonomous, sanctions enforcement becomes exponentially weaker.

New Currency - Issues

However, the implementation of the bric presents non-trivial challenges:

As a currency used primarily for international trade, the bric would complicate the task of central banks in participating countries.
Creating a supranational central bank a la the European Central Bank to manage the bric would be a complex process – the build-out of the EU Central Bank took nearly 10 years.
Finally, the geopolitical landscape among BRICS members also complex – membership is based on economic criteria, rather than political affinity. While the bric represents a common economic goal, member nations like India and China have security interests that are often at odds.

Commodity-backed Currency (Russia)

As a result of sanctions imposed on it by the US and western allies, Russia has publicly opined on the possibility of a commodity-backed currency – specifically, pegging the RUB to oil and/or gold.

Since many countries would not be able to back their respective currencies with a valued commodity, Russia’s proposal has limited practical application within the GSO.

But it is worth considering in the context of the US’ and the EU’s problems with inflation and, more broadly, the not-so-philosophical debate over the merits of a fiat currency. While it is out-of-scope for this research paper to comment on the possibility of runaway inflation in the US (or any other country with a fiat currency), it is worth noting that:

China and Russia each produce more than 11% of the world’s annual gold output.
Russia produces more oil than any country other than the US.
Of the world’s top 20 countries by GDP, Russia is next to last in terms of debt-to-GDP, meaning that it has a relatively low exposure to budget deficits.

Should Russia implement a commodity-based currency, that could create a situation where the RUB is perceived as a much more stable store of value than the USD.

Commodity-backed Currency (China)

While China hasn’t explicitly declared its intent to convert the RMB to a commodity-backed currency, it has introduced an interesting program that addresses concerns about the use of the RMB as an international currency.

The Shanghai Petroleum and Natural Gas Exchange (SHPGX) was established in 2018 to promote the development of China’s oil and gas market and to improve the efficiency of the country’s energy trading system. It offers futures, options, and swaps contracts.

The SHPGX began trading in 2019. In its first year of operation, the exchange traded a total of 100 million barrels of oil and 10 billion cubic meters of natural gas. By 2022, trading volume reached a total of 200 million barrels of oil and 20 billion cubic meters of natural gas.

The SHPGX allows sellers to be paid in either RMB or gold. This is a significant departure from the traditional oil and gas market, where sellers are typically paid in USD. A key function of the SHGPX is to further legitimize the RMB as an international currency – to the extent that sellers can be paid in either RMB or gold, this effectively makes the RMB a gold-backed currency, at least in the energy market.

Tactial Trade Agreements

Major BRICS Agreements

The following are significant BRICS agreements – either organization-wide or between two or more BRICS members.

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Data Source – SINOLOGIX

Major SCO Agreements

The following are significant SCO agreements – either organization-wide or between two or more SCO members.

(swipe on column 2 to scroll table)

Data Source – SINOLOGIX

Other Agreements

The following are notable agreements between countries that are outside the BRICS and SCO organizations.

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Data Source – SINOLOGIX

NOTES

References and Disclaimers

Third-Party Contributors

From time to time, SINOLOGIX offers third-party content that complements our core focus. The authors we endorse are subject matter experts and thought leaders in their respective fields. We strive to offer a diverse range of perspectives on any given topic and these contributors help us achieve that objective.

Works Referenced

Liu, Zongyuan, and Mihaela Papa. “Can BRICS De-Dollarize the Global Financial System?” Cambridge Core, Cambridge University Press, 24 Feb. 2022, https://www.cambridge.org/core/elements/can-brics-dedollarize-the-global-financial-system/0AEF98D2F232072409E9556620AE09B0.

Economic Bits (our side hobby)

"Things change gradually at first...

...then all at once..."

China GDP vs UST Holdings (2010-22) (billions)

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China GDP vs UST Holdings (2010-22) (billions)

Data Source – World Bank

Global FX Exchange Reserves (2001-22) (% of total)

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Global FX Exchange Reserves (2001-22) (% of total)

Data Source – World Bank

Global FX Exchange Reserves (2001-22) (% of total)

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Global FX Exchange Reserves (2001-22) (% of total)

Data Source – World Bank

Western media is starting to pay attention to China’s efforts to influence members of the so-called Global South, or more specifically the BRICS+ and Shanghai Cooperation Organization (with substantially overlapping membership), to denominate international trade in the Chinese Renminbi (RMB), aks the Chinese Yuan (CNY) and/or other local currencies. For very different reasons, Russia has promoted the idea of an entirely new currency for trade settlement. This is an accelerating trend among countries that have formed close economic and political relationships with China.

Coincident with the pivot to the RMB for trade settlement is a growing sentiment among the BRICS+ and SCO members that holding USD as their primary reserve currency poses a risk in the event the US declares sanctions and/or freezes a country’s assets, as happened with Russia and Belarus in 2022.

The combined effect of these two trends should be observable in a country’s US Treasuries holdings, and that’s exactly what we’re seeing in the chart above – China’s USD and Treasuries holdings peaked at $1.277 trillion in 2013 and declined by more than 32% in 2022.

Things change “slowly at first, then all at once”...
Ernest Hemingway, The Sun Also Rises Tweet

China and De-dollarization – Part 1 – Overview

2023-04-06

Chart - Sub Heading - H3

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Newsfeeds

International and APAC

China and De-dollarization – Part 3 – Trade Agreements

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China Semi Sector – 2022 Sanctions – Part 2

Recent news coverage in western media suggests that US sanctions against China’s semiconductor sector have caught the CCP and mainland industry leaders off guard. In this Part 2 of our two-part series on China’s semiconductor market, we do a deep(er) dive on the mainland Chinese chip sector, examine the Chinese government’s strategic plan to decouple China’s reliance on western technology suppliers, and evaluate the outcomes of that strategy.

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2022-11-13

China Semi Sector – 2022 Sanctions – Part 1

Recent news coverage in western media suggests that US sanctions against China’s semiconductor sector have caught the CCP and mainland industry leaders off guard. In this research article, we examine this issue in the context of the global supply chain to analyze the short-term and long-term impact of US sanctions and the implications for both China and key industry players.

2022-10-20

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China and De-dollarization – Part 3 – Trade Agreements

China and De-dollarization

Part 03 - Trade Agreements

Sub Heading

This Week's Topics

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Executive Summary

Overview

Strategic Initiatives

New Development Bank (NDB)

Asia Infrastructure Investment Bank (AIIB)

Common Objectives

SWIFT Alternatives

Alternative Currency Models

Alternative Currency Models - Options

Tactical Initiatives

Issues

Conclusion

Development Banks

New Development Bank (NDB)

NDB Loans vs World Bank - 2014 - 2022

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NDB Loans vs World Bank - 2014 - 2022 (billions)

Asian Infrastructure Investment Bank (AIIB)

AIIB Loans vs World Bank - 2014 - 2022

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AIIB Loans vs World Bank - 2014 - 2022 (billions)

Financial Systems

Overview

SWIFT

Exposure to SWIFT (Russia)

Exposure to SWIFT (China)

SPFS – System for Transfer of Financial Messages

CIPS - Cross-Border Interbank Payment System

CIPS - Annual Transaction Volume - 2016 - 2022

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CIPS - Annual Transaction Volume - 2016 - 2022 (trillions)

CIPS - Issues

Alternative Currency Models

Overview

RMB as Trade Settlement Currency – Concerns

Basket of Currencies

Local Currencies

New Currency

New Currency - Benefits

New Currency - Issues

Commodity-backed Currency (Russia)

Commodity-backed Currency (China)

Tactial Trade Agreements

Major BRICS Agreements

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Major SCO Agreements

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Other Agreements

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NOTES

References and Disclaimers

Related Research and Articles

Economic Bits (our side hobby)

"Things change gradually at first...

...then all at once..."

China GDP vs UST Holdings (2010-22) (billions)

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China GDP vs UST Holdings (2010-22) (billions)

Global FX Exchange Reserves (2001-22) (% of total)

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Global FX Exchange Reserves (2001-22) (% of total)

Global FX Exchange Reserves (2001-22) (% of total)

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Global FX Exchange Reserves (2001-22) (% of total)