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Last week’s BRIC summit is disappearing in the rearview mirror, and fortunately there has been some wildly unrealistic talk of new currencies from the bloc’s five emerging market members – aimed at dethroning the dollar.
Policymakers concerned about challenges to the dollar’s global dominance can return to more realistic challenges facing the incumbent currency, the renminbi. While European governments have envied the dollar’s international status since the 1960s and hoped in vain for the euro to replace it, the reason for Beijing’s swift bid, as the US weaponizes the dollar, takes on more urgency. But it will encounter serious difficulties from China’s fundamental problems – problems that are different from Europe’s traditional weaknesses, but, if any, more deeply rooted.
After the 2010 global financial crisis, then-French president Nicolas Sarkozy made a strong statement about Europe’s desire to challenge the dollar, which seemed largely motivated by envy of the greenback’s status as a reserve and trade currency. This role survived the eventual collapse of the Bretton Woods system of fixed exchange rates in 1973. Europeans complain that the U.S. government and U.S. companies can borrow cheaply and avoid currency risk because commodities and other traded goods are priced and invoiced in dollars. Dollar.
What Sarkozy does not seem to realize is that although the crisis first emerged in the US, it also highlighted the indispensability of the dollar as a currency for bank funding and payments. The Fed’s heroics during the crisis underscored its resilience, preventing a full-blown global financial meltdown by extending swap lines to other central banks.
Neither the weak financial regulation that led to the crisis, nor persistently erratic fiscal policy, including a self-inflicted debt crisis, has shattered market confidence in the Fed-backed currency. Even the destructive President Donald Trump has failed to do this. Meanwhile, the eurozone government bond market and banking system remain fragmented by national borders.
These advantages of the dollar persist. One version of the BRICS fairy tale is some pathetic gibberish from Moscow about the crumbling dollar being challenged by gold-backed BRICS currencies. But the problems that gold was supposed to solve were not: the dollar was clearly not devalued by hyperinflation, and the Fed’s monetary policy independence was not seriously compromised.
The U.S. policy driving China’s actions has a different origin: the weaponization of these payment and financing functions to impose sanctions on America’s enemies. When the situation was limited to countries such as Iran, it caused outrage — including the European Union, where companies are strongly discouraged from trading — but not much panic.
Now it’s spreading to more countries, with the U.S. considering some far-reaching ideas, such as seizing Russia’s central bank reserves to pay for Ukraine’s reconstruction. As my FT colleagues have extensively articulated, more emerging markets are concerned about relying on dollar-denominated plumbing for the global economy.
Unlike the euro, which has little inherent advantage over the U.S. dollar, China has a relatively advanced digital payment system and could portray an official digital yuan as a way to circumvent U.S. sanctions. But here, too, it runs into the same problems that the euro does too.
The dollar system is a set of interlocking systems, and it is difficult to be replaced piecemeal. Cross-border payments can be made in yuan, but are still vulnerable to U.S. Treasury sanctions if either party to the transaction ends up involving payments in U.S. dollars. Oil producers may pay in yuan, but they are unlikely to be willing to hold currency assets subject to capital controls.
As the guardian of the global financial system, China would face serious vulnerabilities. Privacy concerns surrounding central bank digital currencies may be overblown. But full use of the digital yuan is a leap of faith, and the Chinese government, as the world’s snooping experts, will not seek to collect and exploit the personal data of its users.
Likewise, an overactive U.S. government using U.S. banks to go after Russian oligarchs is one thing. But China has imposed wide-ranging trade sanctions on countries – in Australia’s case simply for its reckless demand for an investigation into the origins of Covid-19.
The role of international currencies has changed over time. Ultimately, however, confidence in global standards involves a fundamental trust in the openness and reliability of their issuers.
To be sure, the U.S. appetite for weaponizing global payments networks and other functions is already considerable and likely to grow even stronger if Trump wins the election. A government worried about U.S. sanctions is likely looking to diversify the financial system it relies on, including the yuan. But China under Xi not only finds its growth model in serious trouble, but is moving further toward an authoritarian state that interferes extensively in its economy, citizens’ lives, and security in the region and beyond.
A BRICS currency challenging the dollar is a fantasy, but as far as China is concerned, it has created problems of its own that will hinder attempts by the renminbi to replace the dollar on a large scale.