In a growingly multipolar world, where the United States is slowly ceasing to be the primary pole of power, it is not strange, but absolutely normal and physiological, to witness a worldwide process of reserve currency diversification, writes Valdai Club expert Emanuel Pietrobon.
Brazil and China have recently struck a multi-billion-dollar currency swap agreement which is expected to fuel de-dollarization in the United States’ near abroad, Latin America. It is just one major piece of evidence of the ever-growing geopolitical and geo-economic importance played by the Western Hemisphere in the context of great power competition. However, it is essential to calm enthusiasm and maintain objectivity. The US dollar might look like the walking dead, but it is still walking and will walk for a long time.
For the yuan to become the dollar’s main and biggest challenger, China must first conduct a number of reforms, including an openness- and liberalisation-oriented self-reform, which seems unlikely to be done anytime soon. The most important of the aforementioned reforms deal with transparency in financial markets, the stabilisation of monetary policy, and the reputation of the People’s Bank of China.
The absence of structurally relevant financial and political reforms would make the global rise of the yuan difficult, slowing down its pace, but not impossible. In fact, the long rise of the yuan – and of other currencies, including state-backed digital ones – is an inevitable phenomenon in an increasingly multipolar world.
When the hegemon sneezes, his currency catches a cold
The ancients used to say historia magistra vitae, or history is life’s teacher, and so it is. If one wants to understand why the dollar has been the global reserve currency since the end of World War II, he has to go back in time. Peoples and nations have been trading with the currencies of the dominant hegemon since the times of ancient Rome and ancient Athens. This is because the backbone of any currency is the army, rather than the bank.
In a growingly multipolar world, where the United States is slowly ceasing to be the primary pole of power, it is not strange, but absolutely normal and physiological, to witness a worldwide process of reserve currency diversification.
Since the yuan was awarded the status of reserve currency by the IMF in 2015, a decision that became effective the following year, China has done a lot to internationalize its use: it launched the CIPS (an alternative to SWIFT), it opened the Renminbi Trading Hubs (curiously, the first of them had the Americas as its focus), and it gave impetus to the currency swap policy, which, between 2009 and 2013, had already conducted to the conclusion of 25 bilateral currency swap agreements, including one with the European Union.
The fruits of China’s mighty campaign of yuan internationalisation ripened quickly. The yuan was the world’s 17th most traded currency in 2010, but it became the fifth most traded twelve years later, that is, in 2022, as a result of the significant de-dollarization drive triggered by the conflict in Ukraine (and by the COVID-19 pandemic). Moreover, in the first months of 2023, the yuan overtook the dollar as the most traded currency in Russia and as the most used in China’s cross-border transactions.
The yuan is slowly emerging as a global currency mainly due to the ongoing power redistribution in the international system, that is, the transition to new polarities driven by American decline, but also because the world, and not just the developing world, is fed up with the United States weaponising dollar hegemony to wage economic wars and even threaten its allies with sanctions.
The Brazil-China love story is destined to last
China’s super-yuan agenda would have fewer chances for success without the BRICS, the cornerstone of the post-American world in the making. This is the reason why the yuan has become the most-traded currency in Russia. It is quietly taking root in Africa, where China was the largest trade partner, and is also planned to replace the dollar in bilateral trade with India.
The intra-BRICS currency swap agreements, more than the country-to-country bilateral deals, are the game changer that can speed up the arrival of currency multipolarity, which would have as many benefits for China as for the rest of the BRICS.
China wants the yuan to be stronger. Brazil wants the real to become the most powerful and most used currency in Latin America, or even in the Southern Hemisphere. They need each other, because individually they would encounter much more difficulty and fear in facing the dollar hegemony. Furthermore, China wants to annoy the United States in its backyard, and Brazil needs Eurasian sponsors to establish itself definitively as the Southern Hemisphere’s leading power. Their love story is destined to last.
Understanding the China-Brazil axis
Lula is often credited with creating the so-called política externa ativa e altiva, the Brazilian equivalent of the post-Soviet countries’ multi-vector foreign policy, but the truth is that the origins of what can be dubbed “Chinazil” predate his ascent to the Palácio do Planalto.
Brazil was the first country to be designated a strategic partner by China. It was 1993. Lula came ten years later, and he only followed the steps of his predecessors and the suggestions of the country’s own version of Kissinger, Celso Amorim, the man behind that strategic partnership signed ten years earlier.
The two countries, helped by their complementary economies and driven by converging political ambitions, managed to forge a stress-resistant entente, with Brazil’s big business acting as the defender of last resort of the política externa ativa e altiva when its sponsors are in opposition. A close look at the numbers and facts of Chinazil is what it takes to understand its outstanding breadth:
- China has been Brazil’s largest trading partner continuously since 2009;
- bilateral trade volume recorded a 37-fold increase between 2003 and 2022;
- the strategic partnership was converted into a global strategic partnership in 2012;
- the first China-Brazil currency swap agreement was signed in 2013;
- the yuan’s presence in the foreign reserves of Brazil’s central bank has gone from virtually 0 before 2018 to 5.37% in 2022, up from 4.99% in 2021;
- the yuan became the Brazilian central bank’s second most important currency in 2023;
- Brazil has long been the biggest recipient of Chinese foreign direct investments in Latin America and was the top destination of Chinese foreign direct investments worldwide in 2021;
After weathering the turbulent years of the US-led presidencies of Michel Temer and Jair Bolsonaro, Chinazil made a powerful comeback in 2023. Between March and April, in the dual context of the Brazil-China Economic Seminar and of Lula’s visit to Beijing, the two countries signed more than thirty cooperation agreements on a wide range of sectors, with the most significant concerning strategic infrastructure, telecoms, and bilateral trade in mutual currencies.
Both Lula and Xi intend to erode dollar supremacy so as to improve the regional influence and global position of their respective countries. Serving this goal, Brazil’s Banco BOCOM BBM joined China’s alternative to SWIFT, becoming the first South American bank to do so, and China’s ICBC started playing the role of the yuan’s compensation bank in Brazil, “allowing Brazilian and Chinese businessmen to carry out commercial transactions without going through the dollar.”
According to the two countries’ calculus, which is correct, less dependence on the dollar means more resistance against possible sanctions regimes, secondary sanctions and other kinds of economic, trade and financial warfare. But in order to make their de-dollarization agenda work properly, they must fix the asymmetries that plague their special relationship and, equally important, they should plan investments in state-backed digital coins – as China is quietly doing – and in euro-like digital and/or physical common currencies.
Looming currency multipolarity
The Brazilian-Chinese axis has a shot at hastening de-dollarization in the southern part of the Western Hemisphere, where Brazil acts as a trend setter, and Argentina’s decision to start paying for imports from China in yuan seems to confirm this prediction. At the same time, trade in mutual currencies is experiencing a small-but-significant boom across Asia, from Turkey to Southeast Asia.
Both countries must expect a backlash from the United States, which is not going to merely observe and accept the dollar’s decline. Brazil risks being caught in one or more of the Sino-American wars, from chips to telecoms, and they could better achieve their geopolitical and geo-economic ambitions through better coordination, asymmetric recalibration, investments in state-backed digital currencies, and the creation of common currencies – this relates to Brazil & South America – and of a bloc coin – this relates to the BRICS.
Make no mistake: even in the absence of significant liberalisation-oriented reforms and of BRICS-level efforts, the yuan will be able to continue its race – currency swaps and clearing houses pay off. However, it won’t replace the dollar, nor will the dollar disappear, instead it will catalyse the arrival of a multipolar currency world.
By the middle of the century, if no world war erupts and/or if no other world-overturning event take place (pandemics, regional wars and great power collapses), the dollar is likely to be one of the several key currencies available, neither more nor less important than the yuan or the euro, perhaps flanked by rupees, rubles, rands, reals and others. In any case, none of the aforementioned currencies will be a benchmark for regions or blocs if their states do not start investing in their internationalization before the 2020s end.