US dollar is no longer king as Asean adopts currency swaps

China has been hard at work with its Asian neighbours to promote the use of local currencies in regional trade and investment. Such bilateral currency swaps, as they are called, will help strengthen their economic integration, especially among member states of the Association of Southeast Asian Nations (Asean), and provide a greater financial safety net within the region against external shocks.

They are also a natural evolution as the centre of gravity moves away from the American dollar-dominated trade and financial system towards Asia and its rising economies. Yi Gang, governor of China’s central bank, has rightly hailed the increasingly close Asian economic interdependence, at a recent gathering of the Group of 20.

Regional currency swaps are also important developments as Beijing moves slowly towards the internationalisation of the yuan, and its growing acceptance within the Asean regional trade system. Meanwhile, Moscow and Beijing have agreed a 30-year contract to supply gas to China via a new pipeline and will settle the new gas sales in euros, bolstering a strategic alliance as both countries face increasingly strained relations with the US and its Western allies.

Seen as a zero-sum game, the developments will inevitably reduce the use of the US dollar, weaken its financial hegemony, and dilute the impact of US monetary policy in Asia. Indonesia, which holds the presidency of the G20 major economies this year and is a powerhouse in Asean, cut US dollar exposure by US$2.53 billion last year and a further 10 per cent increase in such settlements is expected this year.

For regional economies, currency swaps make sense both short and longer term. Presently, they face the acute risk of capital outflows as the US is expected to tighten monetary policy. Paradoxically, as the threat of the Covid-19 pandemic recedes, they need to prepare economically for the rainy days ahead. Local currency swaps within the Asean regional grouping plus China, Japan and South Korea, are estimated to have reached US$380 billion a year. While Washington tries to corral Asean countries into its Indo-Pacific strategy to contain China, Beijing prefers to focus on investment and trade deals. The success of the Regional Comprehensive Economic Partnership (RCEP) and rising China-Asean trade have dwarfed US-Asean trade exchanges and investments. Trade between China and Asean nations in 2020 totalled US$685.28 billion, compared with US$362.2 billion US-Asean trade.

Whatever territorial and maritime disputes they may have with China, Asean leaders know the way to national wealth and economic development lies in trade and investment, not sabre-rattling. Given the choice between bread and bullets from China and the US, most Asian leaders will be perfectly pragmatic.