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Is Dedollarization Happening?

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Since China’s Xi Jinping and Russia’s Vladimir Putin met last week, there have been a number of announcements regarding what some are now calling dedollarization.

“China, Brazil strike deal to ditch dollar for trade,” is the latest such headline, while previously it was stated that the BRICS nations of Brazil, Russia, India, China and South Africa might launch a brick currency.

In addition, Saudi Arabia has agreed to join the Shanghai Cooperation Organization (SCO) as a “dialogue partner.” All the while US president Joe Biden holds a Summit for Democracy with over 100 countries, though over zoom.

Dedollarization is a somewhat old topic, starting off around 2010 amid the banking crisis in US. Then in 2014 Russia and China teamed up to work towards moving away from the dollar after Russia first invaded Ukraine.

In 2015 China launched the Cross-border Interbank Payment System (CIPS). Unlike SWIFT (Society for Worldwide Interbank Financial Telecommunication), which is a cooperative owned by its member banks, CIPS is owned and operated by the People’s Bank of China (PBOC), their central bank.

CIPS is a lot more focused on just processing yuan transactions and almost only on cross-border transactions involving China. While SWIFT, a communication platform between banks, has 11,000 financial institutions in more than 200 countries and multiple currencies.

The scale therefore is vastly different, as is the level of global trade carried out in USD or euros, compared to CNY.

The total value of merchandise trade conducted in US dollars in 2020 was approximately $13.8 trillion according to the International Monetary Fund (IMF). It stands at €6.7 trillion for the euro and $2.4 trillion worth in CNY.

This is just raw goods, exports and imports. It does not include services for example or foreign investment and other financial flows.

China is not minuscule on this measure, unlike for foreign currency reserves, but at $2.4 trillion or ¥15.3 trillion that’s about 20% of its GDP compared to some 60% for the dollar.

Bitcoin is also used in global commercial trade at the tune of $120 billion for 2020 according to a report by Chainalysis.

Interestingly, China holds more dollars in reserve than is traded globally in CNY. That’s $3.2 trillion USD, and €761 billion EUR.

$1.1 trillion of it is in US Treasuries. The rest is in cash and deposits with banks and other financial institutions around the world as well as corporate bonds, equities, and real estate.

Global foreign exchange reserves held in US dollars was approximately $6.7 trillion as of Q3 2021, €1.1 trillion for the euro and just $370 billion worth for yuan.

China is the biggest holder of such yuan reserves at over 2 trillion yuan, approximately $310 billion USD.

Japan holds $2.7 billion of yuan, Switzerland has 2.3 billion Swiss francs, Russia at $4.3 billion, Thailand at $1.2 billion and Hungary at $100 million.

Some of these have changed, but by comparison in dollars these countries are holding:

  1. China: approximately $3.2 trillion USD, and €761 billion EUR
  2. Japan: approximately $1.4 trillion USD, and €122 billion EUR
  3. Switzerland: approximately $1.0 trillion USD, and €15 billion EUR
  4. Russia: approximately $586 billion USD, and €23 billion EUR
  5. Thailand: approximately $222 billion USD, and €45 billion EUR
  6. Hungary: approximately $34 billion USD, and €3 billion EUR

So bitcoin is stronger than yuan, though it isn’t quite being held for reserves as far as we are aware. In addition, the use of the dollar in international trade is by far by countries that don’t involve US than that do.

These are estimates, a difficult endeavor, but the Bank for International Settlements (BIS) says the US dollar was used in over 88% of all foreign exchange trades worldwide in April 2019, even though the United States accounted for only around 24% of global GDP at the time, suggesting a significant portion of US dollar transactions involve parties that are not based in the United States.

Finally, where the likes of Saudi Arabia or Iran are concerned, the International Energy Agency (IEA) says the total value of global oil exports was approximately $1.9 trillion for 2020.

According to data from the World Bank, the total value of global exports of fuels and mining products (which includes oil and gas, as well as metals and other minerals) was approximately $2.3 trillion in 2020.

That’s about 20% of all international trade in USD, putting an end once and for all to the petrodollar theories based on these facts.

Not least because even if both Saudis and Iran price their oil in yuan, and not just for China but all, the vast majority of oil trade will still occur at the New York Mercantile Exchange (NYMEX) and the London Metal Exchange (LME), and in dollars.

Dedollarization as such therefore remains largely propaganda, and often unchallenged propaganda, but in the global arena – unlike within unfree countries like China – we can put their claims to scrutiny and they have to withstand it if that propaganda is to have any real effect.

Beyond the raw facts, the fundamental problem with the suggestion that anyone outside of Europe or USA should use a currency other than the dollar is that there is no credible such third currency.

If there was, then it would be used on its own, it wouldn’t need this chest beating in part spurred by the fact that Russia now has no choice but to use a very sub-par currency for international trade.

Yet except Russia, no one else is in that position as other countries of size have sufficiently developed to understand you don’t just send tanks to your neighbor.

Russia whines about others reacting to their barbarism that has children kidnapped through a state level apparatus in the occupied areas of Ukraine.

But China is happy to overlook all this because by using Russia they hope people will be fooled by propaganda to not look at the basic fact of why is no one actually using the yuan?

And the answer is simple: the yuan is basically soft pegged to the dollar.

Using the yuan therefore exposes you not only to the risks in US, but also to the risks in China, a double whammy for no gains whatever as the yuan offers nothing against the dollar, except if you’re Russia as they won’t mind you tanking children.

The People’s Bank of China (PBOC) sets a midpoint target on a daily basis for the exchange rate of the yuan against mainly the US dollar, but also other currencies, as a way to manage its currency.

This midpoint, also known as the central parity rate, can fluctuate by 2% on free market basis, but any fluctuation beyond courts direct intervention by PBOC through either selling or buying yuan.

In addition PBOC itself is not independent as it must follow the guidance of the State Council and the Chinese Communist Party, which sometime directly intervenes.

It is that mid-point targeting that makes yuan a very weak currency because it can lead to market distortion, inflexibility in a lack of ability to adjust to changing market conditions, and it lacks credibility as it’s not the market setting the rate but ultimately the state.

In international trade this can be hugely detrimental as in the case of Russia for example the Chinese government can make exports to Russia cheap and imports from Russia expensive.

This mid-point targeting approach has been opened to criticism of currency manipulation, which is against WTO rules, though US has not officially labelled China as a currency manipulator since 1994.

If the world does not want the dollar, then an actual alternative is the euro, and for the private market itself, arguably bitcoin as well considering it has grown to 1% of US’ global trade in such a fairly short time.

You would use the yuan instead if you have no choice like Russia, you are fooled by propaganda in which case you shouldn’t be in any ruling position, or you are willing to take the risk the currency will be manipulated against you in a targeted manner.

That is all to say China is not offering anything better, which is why they have to rely so much on propaganda. It is offering something worse in a managed floating currency, rather than free floating, and that is why they don’t make any arguments on the merits of why the yuan should be adopted, but on negative marketing whereby US is somehow all the evil things to this heavily censored country that lacks free speech or an independent judiciary.

That Brazil is foolish enough to be used as propaganda fodder, and that China is so desperate they shout so much about it, is a matter for Brazilians but if China was offering an alternative then we’d at least have something to analyze, scrutinize, weight.

Instead, as far as we can tell, China is arguing that US is all abusive and it should be China that does all the abusing. That US cares about human rights and children being killed in Ukraine, but China doesn’t and so countries are free to do war as they please.

They are not arguing that there is something wrong with WTO, or that they should be kicked out of it or leave since they claim they don’t like the current global order and status quo.

They’re not arguing some reforms of UN, or the establishment of some other international body, or international courts, or indeed anything of substance that ensures stable, peaceful and free flowing global commerce.

Instead they pretty selfishingly argue they should make the rules, though just what rules exactly and what is wrong with the current ones they don’t say. And they argue it should be they because they claim it is the US, but we disagree.

The current rules in commerce are currently largely set by the market, and the current rules more widely are ultimately set both by the academia or the pen, and the independent courts.

That’s the current framework of the Enlightenment, and anyone of sense wouldn’t swap that objective framework with the capricious decision making of one man that can decide to remove his term limits as he please or house arrest an innovator for daring to speak of how we can have more innovation. And just speak, nothing else.

If that’s what they do in their own country, imagine in any other country that is foolish enough to make themself dependent.

And where commerce is concerned, the lack of independent courts is a deal breaker because they are necessary to protect innovation, especially of the fundamental sort.

Putin himself once said the stone age did not end due to the lack of stones. Innovation is hard however, especially when nascent, and in a system without independent courts it can very easily disappear at that nascent stage.

That is not easily felt as you don’t know what you don’t have, but we are in the cusp of an industrial revolution driven by two decades long hard research that is now finally starting to bear fruits.

Some economies will leap, and that’s when we’ll see just what system is better, as well as just how ephemeral relying on an appeal to emotions is in front of objectivity.

And objectively speaking, to answer the title question and based on the facts available, the use of the dollar in global trade and finance remains dominant on its own, and vastly dominant in combination with the euro, because they are the most open markets and the most fair markets with a rules based system and due process that protects innovation and human rights for the best combination of a prosperous global order and largely peaceful that has allowed and facilitated countries like Brazil or China, Africa or India, to get out of poverty, improve their standards of living, even if some of those countries are now foolish enough to claim there’s a better system.

Well, where was it while you grew so much? And since such experiments previously have gone very wrong with communism and nazism, what makes China or anyone so sure that this polarization attempt would go any better when they offer no improvement whatever on the centuries long hard work of the pen that has come up with liberalism.

Follow those rules, starting with letting CNY free float, and then engage in propaganda because in the global arena your propaganda will be challenged and scrutinized, making you look like an idiot in the end if it is just based on emotional nonsense with nothing concrete to it.

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