Global de-dollarisation fast underway
The US dollar is losing its shine as the dominant currency in international trade and foreign exchange reserve of governments.
A global trend toward “de-dollarisation” has already begun. The last piece of “load-bearing wall” of the “US Empire State Building” has cracked, in other words.
Global policies for “de-dollarisation” include sharply reducing US debt holdings, dropping US dollar’s status as an anchor currency, increasing non-dollar bulk commodity trade, growing the reserve of non-dollar currencies and ramping up gold’s hedge against the dollar.
Looking from the perspective of the US debt, the 22 consecutive months from April 2018 to March 2020 saw global central banks reduce their US debt holdings.
In March, the US Federal Reserve pledged unlimited quantitative easing, purchasing over US$1 trillion Treasuries within a month.
The Federal Reserve has become the largest receiver of US Treasuries.
In the same month, yields on both one-month and three-month Treasury bills were negative, while the yield for the 10-year Treasury hit below 1% for the first time, according to media reports.
This exemplifies global anticipation of a weaker US economy.
Although the possibility that a small number of foreign investors will increase their holdings of US Treasuries in the short run cannot be ruled out, in the long run international investors will likely reduce their US debt holdings.
The Federal Reserve, which has spent over half a century building up its global credibility, has become the last ditch of US Treasuries.
In recent years, many G20 members such as China, France, Germany, and Russia have reduced their use of the US dollars in trade deals.
According to information disclosed by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the share of US dollars in the international payment market in May was 40.88%, a drop from 44.1% in March.
While the market estimates there is still a long way to realise “de-dollarisation”, some countries are becoming restless to achieve it.
The SWIFT system, which has been traditionally used for trade clearance and payments, and which is overwhelmingly controlled by the United States, has been widely criticised across the world.
Many countries are striving to construct de-dollarising payment systems. For example, China launched the Cross-border Interbank Payment System in 2015.
It is very likely that the share of US dollars in international payment systems will drop to below 40%.
The share of the US dollar in total foreign exchange reserves of all IMF member countries has fallen from 72% in 2000 to 61.99% at the end of the first quarter in 2020.
Although the US dollar’s share of foreign exchange reserves still ranks first worldwide, its decline in recent years is quite obvious.
Countries are determined to diversify their foreign exchange reserves.
It can be seen that central banks of many countries have increased their gold reserves, and the year 2019 marked the 10th consecutive year of annual net purchases of gold.
To offset risks brought by US dollars, the US share in global gold reserves fell from 23.64% at the end of June 2019 to 15.5% at the end of June 2020.
This reflects the weakening of trust in the US dollar by many countries.
It is conceivable that the US sanctioning against China due to the country’s national security legislation for Hong Kong will further accelerate most countries’ “de-dollarisation” programmes.
In addition to US Treasuries, payments as well as foreign reserves, digital currency and the Covid-19 pandemic are the latest factors that trigger the hastening of the “de-dollarisation” progress.
Digital currency seeks a comprehensive replacement of the US dollar as the primary international currency in terms of issuance, technology and tools.
Major economies including China, the EU, and Japan, plus many multinational corporations, have conducted long-term digital currency research.
Since the beginning of the 21st century, many doubters of “de-dollarisation” have been holding that global “de-dollarisation” is still in its infancy.
They feel markets are very dependent on the US dollar. But the Covid-19 pandemic seems to have triggered a faster “de-dollarisation” progress.
In view if the various diplomatic considerations and the market’s expectations for the US dollar, one can conclude that the United States can never form a strategic containment circle against China.
China is confident of this.
The author is professor and executive dean of Chongyang Institute for Financial Studies at Renmin University of China, and executive director of China-us People-topeople Exchange Research Centre. His latest book is Great Power’s Long March Road.wangwen2013@ ruc.edu.cn. Chongyang Institute for Financial Studies is a private think tank set up by Qiu Guogen, an alumni of Renmin University and chairman of Shanghai Chongyang Investment Group Co Ltd.
The views are the writer’s own