The De-Dollarization in China

"China’s idea is to create an international currency based on the IMF's Special Drawing Rights and freely expendable on world markets, in lieu of the US dollar, so as to avoid 'the dangerous fluctuations stemming from the US currency and the uncertainties on its real value.'" Analysis by Prof. Giancarlo Elia Valori

Image: Bigstock

The US dollar is highly important in today’s economy for three main reasons: the huge amount of petrodollars, the use of the dollar as the world’s reserve currency, and the decision taken by US President Nixon in 1971 to end the dollar convertibility into gold.

The US currency is still a large part of the Special Drawing Rights (SDR), the IMF's "paper money." A share ranging between 41% and 46% depending on the periods.

Petrodollars emerged when Henry Kissinger dealt with King Fahd of Saudi Arabia, after "Black September" in Jordan. The agreement was simple. Saudi Arabia had to accept only dollars as payments for the oil it sold but was forced to invest that huge amount of US currency only in the US financial channels while, in return, the United States placed Saudi Arabia and the other OPEC neighboring countries under its own military protection.

Hence the turning of the dollar into a world currency, considering the importance and extent of the oil market. Not to mention that this large amount of dollars circulating in the world definitely marginalized gold and later convinced the FED that the demand for dollars in the world was huge and unstoppable.

An unlimited amount of liquidity that kept various US industrial sectors alive but, above all, guaranteed huge financial markets such as the derivatives – markets based on the structural surplus of US liquidity.

After the Soviet Union’s collapse, the United States always thought about world’s hegemony and, above all, imagined to oppose the already active Eurasian union between China, Iran, and Russia – the worst nightmare for US decision-makers – both at military and financial levels.

As early as those years, following Brzezinski’s policy line, the US analysts warned against the unification of Eurasia – to be absolutely prevented – and against the subsequent reunification of Eurasia with the Eurasian peninsula, to be avoided even with war.

At that time, the three aforementioned states still conducted their business in dollars: China wanted to keep on becoming the "world factory," Russia had run out of steam and was near breaking point, and Iran had to inevitably adapt to the rest of Sunni OPEC.

With Putin’s rise to power, Russia’s de-dollarization began immediately. The share of dollar reserves declined year after year, while Putin proposed new oil contracts. Since last year, for example, dollars cannot be used in ports.

In the case of Iran, the sanction regime – in particular – has favored the discovery of means other than the dollar for international settlements.

The operations and signs of the de-dollarization continued.

The war in Iraq against Saddam Hussein was also a fight against the Rais who wanted to start selling his oil barrels in euros, while the war in Afghanistan was viewed by China as part of the ongoing overall encirclement of its territory.

Hence the importance of the Belt and Road Initiative. The war in Afghanistan was also an attempt to stop the Eurasian project of economic and commercial (as well as political) union between Russia, Iran, and China.

As a further sanction, the United States has removed Iran from the SWIFT network, the well-known world interbank transfer system, which is also a private company.

Iran, however, has immediately joined the Chinese CIPS, a recent network, similar to SWIFT, with which it is already fully connected.

Basically, China’s idea is to create an international currency based on the IMF's Special Drawing Rights and freely expendable on world markets, in lieu of the US dollar, so as to avoid "the dangerous fluctuations stemming from the US currency and the uncertainties on its real value," as the Governor of the Chinese central bank, Zhou Xiaochuan, who will soon be replaced by Yi Gang, said.

In the meantime, Russia and China are acquiring significant amounts of gold. In recent years, China has bought gold to the tune of at least 1842.6 tons, but the international index could be distorted, as many transactions on the Shanghai Gold Exchange are Over the Counter (OTC) and hence are not reported.

According to official data, Russia is supposed to have reached 1857.7 tons. Both countries have so far bought 10% of the gold available in the world.

Meanwhile, Saudi Arabia has already accepted payments in yuan for the oil sold to China, which is its largest customer. This is a turning point. If Saudi Arabia gives in, sooner or later all OPEC countries will follow suit.

In many cases, India and Russia have already traded with Iran by accepting oil in exchange for primary goods and commodities.

China has also opened a credit line with Iran amounting to as many as 10 billion euros, with a view to getting around sanctions.

It is also assumed that North Korea uses cryptocurrencies to buy oil from China.

As devastated as its economy is, Venezuela no longer sells its oil in dollars – and it is worth recalling it can boast the largest world reserves known to date.

Furthermore, China will buy gas and oil from Russia in yuan, with Russia being able to convert yuan into gold directly on the Shanghai International Energy Exchange.

Keynes’ "tribal residue" takes its revenge.

So far, the agreements for trade in their respective currencies were signed between China and Kazakhstan (December 14, 2014), between China and South Africa (April 10, 2015), and between Russia and India (May 26, 2015) while, at the end of November 2015, the Russian central bank included the yuan into the list of currencies that can be accepted as reserves. On November 3, 2016, an agreement was signed between Turkey and Russia for the exchange of their currencies, and in October 2017, a similar agreement was reached between Turkey and Iran.

For financial institutions, the de-dollarization continued with the establishment of the BRICS Fund worth 100 billion dollars (July 16, 2014) and with the establishment – on January 16, 2016 – of the Asian Infrastructure Investment Bank (AIIB), made up of 57 member countries, including Italy, which automatically caused the US anger.

In May 2015, the Russian-Chinese Investment Bank was created, followed by the opening of the new bank for the development of BRICS in July 2015, based in Shanghai. In November 2015, Iran approved the establishment of a bank together with Russia.

It is worth underlining that in April 2015, the Russian national credit card system was opened, dealing also with small currency transfers.

It is also worth recalling the Duma law on de-offshorization of November 18, 2014, i.e., the legislation obliging the Russian companies resident abroad to pay taxes directly to the Russian Treasury.

The above-mentioned Chinese CIPS started operating in October 2015, while in March 2017 Russia implemented a system similar to SWIFT (interacting with the Chinese one).

The issue is complex because with fracking, the United States has become the first oil producer – hence there is less need to keep the huge amount of petrodollars. This happens while a natural oil and gas shale deposit has just been discovered, off the coast of Bahrain, with reserves of 80 billion oil barrels and 4 trillion cubic meters of gas.

The United States no longer buys oil and gas because it does not need them, but China is increasingly the best global buyer.

Apart from the stability of gas and oil prices, which should be guaranteed in the coming years, China and its allies should be ever more able to select between the supply and, certainly, between the countries which accept the non-oil bilateral exchange with China and payments in yuan or gold.

Still today, the US GDP accounts for 22% of world’s GDP, while 80% of international payments are made in dollars.

Hence, the United States receives goods from abroad always at comparatively very low prices, while the massive demand for dollars from the rest of the world allows the refinancing of the US public debt at very low costs.

This is the economic and political core of the issue.

In fact, the Russian government held a specific meeting on de-dollarization in the spring of 2014.

This is another fact to be highlighted. It is a political operation that appears to be a financial one, often in contrast with the "volatility" of current markets, but its core is strategic and geopolitical.

In theory, the de-dollarization regards three specific issues: payments, the real economy issue and ultimately the financial issue, namely the financial contracts denominated in dollars.

In the first case, China will tend to eliminate every transaction denominated in US dollars by third countries and to remove settlement mechanisms involving the dollar and operating in its neighboring areas.

In the second case, the dollar transactions will be – and are already – largely prohibited for individuals.

In the third case, the share of foreign contracts denominated in yuan is now equal to 40% and strong acceleration will be recorded in 2018.

The oil futures denominated in yuan are now booming. The first attempt was made in 1993 when China opened its stock exchanges in Beijing and Shanghai.

China itself closed operations two years later, due to market instability and to the yuan weakness.

Two other things have changed since then: in 2016, the yuan was admitted as a currency making up the IMF Special Drawing Rights and in 2017 China overtook the United States as the world's largest oil importer.

Hence, thanks to the oil futures denominated in yuan, China is reducing its dependence on the dollar and, in the meantime, it is supporting its oil imports, as well as promoting the use of the yuan globally and expanding its presence in the world.

Russia has done the same.

Therefore, the United States is about to be ousted as world’s currency due to its continuous series of wars and military failures (former President Cossiga always told me: "The United States is always on the warpath and up in arms, but then it is not able to get out of it") and, like everyone else, it shall pay for its public debt, which is huge and will be ever more its problem, not ours.

Here it is worth recalling what the US Treasury Secretary, John Connally, said to his European counterparts during a meeting in 1971: "The dollar is our currency, but your problem."

Obviously, in relation to all these issues which concern the euro as well, the European Union is silent and sleepy.

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