Will China and Russia herald the end of US Dollar’s hegemony
Photo: Xinhua Agency
 
A common bete noire has underscored the need for both countries to form a united front to ratchet up some counter strikes, especially creating an alternative global reserve currency to dethrone the US Dollar,It might be a long and difficult journey, but the two countries found it imperative to embark on it.
 
During the just concluded Eastern Economic Forum, China and Russia reached wide-ranging agreements on realms such as finance, investment, sports, media and local government exchanges. It is a new period of higher-level and faster development in the Sino-Russian relationship as touted by the two leaders. 
 
As cozy as it may look, the high profile show of romance is more of a product made by pressure from the US. Since Russia’s annexation of Crimea, sanctions against Russian oligarchs and their companies have caused both the Russian stock market and the Russian ruble to fall sharply. As for China, its export faces sharply higher tariffs due to Trump’s trade war, and its stock market and currency are also crumbling. A common bete noire has underscored the need for both countries to form a united front to ratchet up some counter strikes, especially creating an alternative currency to challenge the US Dollar’s hegemony.
 
Rise of the Ruble and the Yuan
 
China is Russia’s largest trading partner, bilateral trade between Russia and China increased by 31.5 percent, reaching $87 billion and accounting for 15 percent of Russian international trade last year, according to official statistics, and this year, it is expected to break the $100 billion mark. To reduce the dependence on the influence of third countries, the two countries are promoting settlements in ruble and yuan, bypassing the US dollar and other Western currencies. 
 
During the Eastern Economic Forum, Moscow and Beijing have reached a joint agreement which was later signed by Russian President Vladimir Putin and Chinese leader Xi Jinping, which envisages “further strengthening of the Russian-Chinese cooperation in the financial sector, promoting increase of the share of national currencies in trade payments, investments and financing, expanding collaboration in such fields as payment systems and insurance.” 
 
Both Russian and Chinese companies are willing to pay in ruble and renminbi as proven by real numbers. Last year, nine percent of payments for supplies from Russia to China were made in rubles. Russian companies paid for 15 percent of Chinese imports in the renminbi. Just three years ago, the numbers were two and nine percent, respectively.
 
Currency tiff in the cards
 
For decades, the dollar has been the world's most trusted currency, with governments around the world holding the bulk of their reserves in dollars while crude oil and many commodities are denominated in dollars. Business deals around the world are mostly done in dollars.  
 
This is a big disadvantage for these countries to use their reserve to invest in U.S. Treasury bonds, which has seen its value declining persistently as the U.S. has run a budget deficit in 41 of the last 45 years. But they are more or less obliged to invest U.S. dollars they earn from their export surpluses, including China’s central bank’s annual flow of U.S. dollars, or the U.S. dollars of Japan’s trade surplus, or Russia’s prior to 2014, or Germany and other countries with a trade surplus.
 
The second risk factor is the global debt has increased by roughly US$ 21 trillion in 2017 alone. That is roughly the equivalent of this year’s U.S. national debt. This has led to a forward-looking anxiety in the world’s markets, and a growing desire by some countries to do something to pre-empt being caught up in these increasingly uncertain, predominantly dollar denominated risks.
 
It is likely that as more countries seek to hedge their dollar related risk, an escalating currency tiff is in the cards. The Chinese yuan is gaining internationally among users. Russia, Turkey, and Iran are making payments in their national currencies. Iran recently announced a switch from the dollar to the euro as its reporting currency. Russia and China already have a currency swap agreement that avoids settlements in the greenback. Even Saudi Arabia will have to make a choice probably sooner than later, to stick with the petrodollar, or go with its biggest customer – China and therefore the yuan.
 
Dethrone the Petrol dollars
 
Currently, the global hydrocarbon trading system, as well as for other commodities are predominantly denominated in US dollars. This is what largely underpins the dollar’s status as the world's leading reserve currency. However, as China surpassed the US as the world's largest oil importer in 2017, the yuan is seeking to dislodge the US petrodollar from one of the fastest growing oil markets in the world.
 
Having established a crude oil futures market in Shanghai and introduced a benchmark index of oil with a price in yuan, China wants to obtain global pricing power for the commodity, on par with West Texas Intermediate (WTI) on the New York Mercantile Exchange and Brent on the London-based ICE Futures Europe.
 
Thus, by kicking off yuan-denominated oil futures, Beijing could kill two birds with one stone — reducing its dependence on the dollar amid a growing oil appetite, and further promoting the yuan. Moving oil trade out of dollars into yuan will take right now between $600 billion and $800 billion worth of transactions out of the dollar. 
 
Due to sanctions and global intimidation by the U.S. Treasury Department, Iran, in particular, was one of the first to adopt yuan-based oil sales and followed by Venezuela. For the same reason, Russia agreed to trade some oil based on the yuan in 2015. Any decline in the status of the petrodollar will severely weaken Washington's ability to maintain its economic hegemony.
 
Bit of stretch to replace USD
 
The idea of a creating an alternative global reserve currency isn't new. The proposal isn't likely to gain much traction because it faces major obstacles. It would require acceptance from nations that have long used the dollar and hold huge stockpiles of the U.S. currency.
 
According to analyst, managing such a currency would require balancing the contradictory needs of countries with high and low growth or with trade surpluses or deficits. The 16 European nations that use the euro have faced "huge difficulties" in managing monetary policy even though their economies are similar. 
 
It’s comparable to replace the English’s role as the lingua franca of international business. Whether you like it or not, businessmen across the globe are speaking to their foreign counterparts in English. That’s the same reason they opt for the dollar: it’s stable, trustworthy and easy to exchange.
 
For this reason, any countries trying to challenge the status of the greenbacks are caught in the dilemma: to accept the USD in international transactions and surrender to the influence of the US, or to embark on a long and difficult journey to create an alternative currency.
 

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