Source: Global Times
Editor's Note: Are we witnessing great changes in the international monetary system and the global financial landscape? Many countries have recently sold a large number of US bonds, Russia, India and other countries have actively built a non-dollar settlement system, and Israel has promoted the diversification of foreign exchange reserves - under the influence of the Federal Reserve's aggressive interest rate hikes and the united States' use of financial hegemony to arbitrarily sanction Russia after the outbreak of the Russian-Ukrainian military conflict, the de-dollarization of countries has been accelerating. "Are we witnessing the beginning of global de-dollarization?" This is a question raised by many media. Rogoff, a professor of economics at Harvard University, predicts that the dollar's dominance of the global financial system is likely to end within 20 years.
Lips are dead and teeth are cold, and multinational operations are speeding up
On July 27, the Fed announced a 75 basis point rate hike, the agency's fourth rate hike this year. The Fed has aggressively raised interest rates several times this year, exacerbating debt crises in heavily debt-ridden developing countries such as Sri Lanka. The risk of cyclical global market shocks caused by the US dollar, as well as the behavior of the United States to "weaponize" the US dollar and sanction Russia after the outbreak of the Russian-Ukrainian conflict, have made countries feel cold and wary of the US dollar, and their de-dollarization actions have been accelerating.
The dollar sell-off intensified
One of the manifestations of the acceleration of countries' de-dollarization actions is the massive dumping of US Debt. According to foreign media statistics, global US debt reserves have continued to decline in the past two years, and by June this year, they have fallen to the lowest level since October 2020. In May, overseas authorities such as central banks and sovereign wealth funds sold US Treasuries to US$34.1 billion, the largest monthly sell-off since the outbreak of the COVID-19 pandemic in the United States.
As the largest holder of U.S. treasuries, Japan reduced its holdings of U.S. treasuries for three consecutive months, with its holdings falling to $1.2128 trillion in May, down $5.7 billion month-on-month. As the United States' second-largest overseas creditor, China's U.S. debt holdings fell to $980.8 billion in May, down $22.6 billion from the previous month and less than $1 trillion for the first time since May 2010. In addition, Ireland, which holds seventh-highest U.S. Treasuries, and Canada, which holds 12th, reduced their holdings by $20.3 billion and $9.4 billion, respectively, in May.
In some countries, the proportion of the United States dollar in foreign exchange reserve currencies is also decreasing. The International Monetary Fund (IMF) recently released the "Official Foreign Exchange Reserve Currency Composition" (COFER) report shows that in the fourth quarter of 2021, the market share of the US dollar in the international reserves of global central banks fell from 59.15% in the previous quarter to 58.81%, a new low in 26 years. In addition, starting this year, Israel, an ally of the United States, has included the yen and the like in its foreign exchange reserve currency. Previously, Israel's foreign exchange reserve currencies were only the US dollar, the euro, and the British pound.
Multinational countries settle international trade in their national currencies
After the outbreak of the Russian-Ukrainian conflict, the United States froze hundreds of billions of dollars of Russian reserve assets. Russia, which has been hit hard, and other countries that fear U.S. sanctions, are pushing ahead with the use of non-dollar international trade settlements. On July 26, Iran's economy minister said it had confirmed that it would no longer use dollar transactions in Iran's economic and commercial trade with Russia. India has also negotiated with Russia to bypass the dollar and push for trade settlement in rupees and rubles. According to the US Capitol Hill newspaper, after the United States sanctioned Russia, many countries have doubts about continuing to use the US dollar for international trade settlement, including the BRICS countries, which account for more than 24% of the world's gross domestic product (GDP).
Some international organizations also plan to promote trade settlement in the currencies of countries in the region. Russian Deputy Minister of Industry and Trade Gruzdev said a few days ago that the financial sectors of the SCO countries are agreeing on a roadmap for member countries to gradually increase the share of their currencies in mutual settlement. Former Brazilian President Lula, who is targeting this October's election, recently said he wanted to create a digital currency "Sur" in Latin America, "because we can't continue to rely on the dollar."
Look for a SWIFT alternative system
After the outbreak of the Russian-Ukrainian conflict, in order to destroy the Russian economy, the United States and other Western countries kicked Moscow out of the Global Interbank Financial Communications Association (SWIFT) payment system, which further accelerated Russia's search for an alternative SWIFT system.
Russian Satellite News Agency said on July 27 that Russia and Iran are establishing a joint interbank payment system. Some senior Iranian officials said that Iran and Russia have actually reached a "very good agreement", on the basis of which foreign exchange transactions between the two countries will be completed. Earlier, Russian presidential assistant Oreshkin revealed that the Russian government plans to establish a foreign economic and trade system so that it does not have to pay through the SWIFT system when conducting international trade. He said that At present, Russia is consulting with Turkey and other countries to develop a new mechanism. In fact, after Russia was subjected to Western sanctions because of the Crimean crisis in 2014, it was seeking to establish an alternative system for SWIFT and launched the Russian financial information transmission system SPFS. As of June this year, 70 financial institutions from 12 countries had access to the SPFS system.
In addition to Russia and Iran, the RBI launched a new mechanism for international trade settlement in Indian rupees on July 11 and announced that it would take effect immediately. The five largest ASEAN economies reached a consensus in July to set up a regional integrated payment network to bypass the US dollar and directly settle foreign exchange. Cambodia's Khmer Times recently reported that after the United States sanctioned Russia, more than 20 countries have established independent financial clearing systems, and bilateral or small multilateral payment and settlement systems are taking shape. Once a new payment settlement pattern is formed, the proportion of the US dollar in international payment settlement will further decline. Depoliticization will be a major consideration for countries in choosing payment settlement channels, which will accelerate the restructuring of the international monetary system and the global financial order.
"How quickly the dollar will lose its status, I can't be sure. But it is clear that the process of global de-dollarization has begun and cannot be stopped. Vorokin, chairman of the Russian State Duma (the lower house of parliament), said. Rogoff, a professor of economics at Harvard University and former chief economist of the International Monetary Fund, predicts that the dominance of the dollar is likely to end within 20 years.
From the euro, to the "Sucre", to the PAPSS
"The dollar is our currency, but it's your problem." After the establishment of dollar hegemony, former US Treasury Secretary Connery's words have been continuously verified.
The United States has been harvesting global wealth through dollar hegemony. When entering the interest rate reduction cycle, the US domestic dollar flows to the world through the purchase of global goods or foreign investment, driving global asset prices up, and US capital can obtain a large amount of appreciation returns; When entering the interest rate hike cycle, a large amount of overseas capital returns to the United States with the return on appreciation that has been obtained, while the outflow of dollars usually depreciates, the cost of repaying dollar debt increases greatly, and asset prices fall; When the interest rate cut cycle is once again entered, U.S. investors can take low-interest loans in the us dollar and easily buy high-quality assets with plummeting prices in other countries.
In the 1970s and 1980s, the Fed's unexpected interest rate hikes plunged Latin American countries into a debt crisis, giving them a "lost decade." After the outbreak of the Asian financial crisis in 1997, South Korea fell into crisis due to the lack of foreign exchange to repay its debts, and the United States used the IMF to suck South Korea's wool. The IMF provides short-term liquidity and foreign exchange to South Korea, but one of the conditions is that South Korea must open its domestic market and allow European and American capital to enter South Korean large enterprises. As a result of the US approach, many Korean companies are now actually controlled by European and American capital, and the money earned by these Korean companies has to be distributed to European and American capital.
The above tragedy may be repeated in the near future. The Venezuelan Southern Television website recently quoted Hudson, a professor of economics at the University of Missouri, as saying that the Fed's recent continuous tightening of monetary policy, coupled with rising oil and food prices, may bankrupt some developing countries and force them to sell public assets to US investors. Hudson said the United States is implementing monetary policy through the Federal Reserve that bankrupts developing countries.
In this context, de-dollarization is not a "new trend". Over the past few decades, many countries have used various means to try to reduce the risk to the dollar and the international financial system controlled by the United States.
The euro, born in 1999, was once highly anticipated. When the European Union introduced the euro, economists wondered if it could challenge the dollar's hegemony. Although 19 countries have now joined the eurozone and the euro already accounts for about 20% of global foreign exchange reserves, the euro is still far from the dollar's position. This can be seen from a complaint by juncker, then president of the European Commission in 2018: the EU, as a large energy importer, in the case of only about 2% of energy imports from the United States, 80% of energy imports are settled in US dollars, which is ridiculous!
The reason why the road to challenging the dollar is so difficult, in addition to the shortcomings of the euro itself, is also related to the United States to suppress the euro in order to maintain the status of the dollar. A few months after the birth of the euro, the US-led NATO launched the Kosovo War, which led to a large amount of capital quickly fleeing Europe and pouring into the United States and other places. There has always been analysis that the Kosovo war is also an indirect financial war by Washington against the euro.
While the euro has failed to shake the dollar's position, attempts to reduce dependence on the dollar by unifying currencies or reaching intraregional currency settlement agreements around the world have not stopped. Since the beginning of this century, Latin American countries have tried many times to create a unified currency, including the Bolivarian Union of the Americas, which put into use the unified monetary mechanism "Sucre" in 2010. In 2010, Sucre first appeared as a virtual currency in transactions between Ecuador and Venezuela. The frequency of use of the currency peaked in 2012, with the associated trade worth nearly $1.066 billion, but that number has since shrunk.
With the improvement of integration, African countries have also explored the establishment of their own unified currency and settlement systems in recent years. Launched in Ghana in January, the Pan-African Payment settlement system (PAPSS) allows buyers in African countries to pay in their own currency and sellers in another country to receive payments in their own currency. However, according to local media reports, the PAPSS system needs to be piloted in the West African currency region before it can be gradually promoted after success. In addition, the main users of the Russian SPFS system are Russian domestic institutions, which is difficult to replace SWIFT. The Trade Exchange Support Tool (INSTEX), previously built by European countries and Iran, has been almost unable to be used substantively due to U.S. obstruction.
The dollar is "too big to fall"?
In recent years, with the United States overdrawing the credit of the us dollar as a major international currency and frequently using the using of the us dollar as a weapon to sanction other countries, the call for de-dollarization has once again risen to a new height. However, according to Bloomberg, several experts at the Federal Reserve Bank in New York believe that the dollar's position as the world's major reserve currency is still quite solid, and "there is nothing in the world to match."
Shi Lei, a senior analyst in the field of foreign exchange, told the Global Times reporter that the current de-dollarization actions of various countries have not yet had a direct impact on the hegemonic status of the US dollar. Although the dollar's position in the global monetary system has indeed declined in recent years, it has taken the lead in global trade settlements, central bank foreign exchange reserves, and global debt valuation, and is difficult to be quickly replaced. In addition, although the US economy and the US dollar have exposed more and more deficiencies, the international community has not yet emerged a currency that can replace the US dollar.
Many analysts believe that the dollar has now shown a situation of "too big to fail". Liang Haiming, president of the Silk Road Zhigu Research Institute, said that once the status of the us dollar is no longer there, other central banks and international investors will rush to get rid of the US dollar and US dollar assets, resulting in a sharp depreciation of the US dollar, including China, and all countries, including China, will suffer serious losses because of the holding of US dollar assets. At the same time, other central banks and international investors will frantically buy currencies such as the euro, the yen, and the renminbi, as well as related assets as their foreign exchange reserves and new investment targets, which will cause the exchange rate of the relevant currencies to appreciate sharply, and the export trade of the countries to which the currency belongs will be severely frustrated.
Harvard University professor Rogoff previously told Bloomberg that for smaller emerging market countries, cryptocurrencies can be used as a substitute for the US dollar, while for large countries, a major challenge to replace the US dollar with their national currencies is the need to produce "huge network effects".
In an interview with the Global Times, Liang Haiming said that if a country wants to establish a currency that competes with the US dollar, it needs to think about how to establish a strong enough credit support to improve the use and liquidity of the currency. Liang Haiming stressed that if a certain currency can replace the US dollar, then this currency should be produced under the system of transcending countries, transcending economic unions, and transcending political alliances, so as to maintain its status as an international currency and continuously improve it.