Russia and China have launched another attempt to develop a "new global reserve currency." In other words, they are again attacking the dollar. Meanwhile, President Joe Biden looks as if he is trying to kill the dollar. In Beijing and Moscow, they cannot believe their good fortune. Pictured: Russian President Vladimir Putin and Chinese President Xi Jinping meet in Beijing on February 4, 2022. (Photo by Alexei Druzhinin/Sputnik/AFP via Getty Images)
"The issue of creating an international reserve currency based on a basket of currencies of our countries is being worked out," said Vladimir Putin in June, at a meeting of the BRICS—Brazil, Russia, India, China, South Africa—grouping.
Russia and China have launched another attempt to develop a "new global reserve currency." In other words, they are again attacking the dollar.
A "coordinated global challenge taking place to the U.S. dollar... would be the biggest news story in decades," writes "Tyler Durden," the pseudonym for in-house staffers at the ZeroHedge site. Durden is "stunned that nobody seems to care that arguably the largest shift on the global macroeconomic playing field over the last half century may be taking place."
Hold the "shift" language. There's only one country that can dethrone the dollar, and it's not a BRICS nation. It's the United States. President Joe Biden is China's and Russia's biggest ally in "dedollarizing" the world.
The BRICS currencies are weak. Russia's ruble, although showing surprising strength of late, is tied to a country in long-term—and seemingly irreversible—decline. Moreover, the Russian Federation, thanks to its aggression and barbarism in Ukraine, is cementing its role as a pariah.
South Africa is a country going into reverse. Brazil, where a leftist is leading in the polls ahead of October's presidential election, is also not bound for economic glory. India, certainly large and arguably headed for riches, is just not ready for economic or financial leadership.
The success of the BRICS reserve currency, therefore, depends on the Chinese renminbi.
Many are optimistic about the "redback," as some now call it. David Goldman, for instance, talks about China "Sino-forming" the Global South and argues that renminbi usage will grow as a result.
Beijing touted the increase of usage of its currency in May, when the yuan, as Chinese money is informally known, accounted for 2.15% of global currency payments, according to the Society for Worldwide Interbank Financial Telecommunication, better known as SWIFT. That made it the world's fifth most-active currency.
Yes, May usage was up. In April, the comparable figure was 0.01% lower.
The overall trend is negative, however. The renminbi accounted for 3.2% of global transactions in January, making it the fourth most-used currency. In prior periods, the yuan was even more widely used.
There's a reason the renminbi is an international pipsqueak. What China especially lacks is the most important attribute for reserve currency status: free convertibility into other currencies.
Chinese leaders have consistently failed to make their money freely convertible. Before the Asian financial crisis of 1997, they promised to do so by the turn of the century. In January 2011, Yi Gang, then chief of the State Administration of Foreign Exchange, promised China would make the renminbi convertible on the capital account—in other words, allowing the free repatriation of investment capital—in five years.
At the end of 2015, it was widely believed the Communist Party's Fifth Plenum would announce the abolition of all capital controls by 2020, the end of the country's 13th Five-Year Plan. The Party failed to make that promise, however. China is no closer to free convertibility now.
There have been, during the course of decades, small liberalizations in China, but the advances have often been formally reversed or not implemented. Beijing, for instance, in 2015 stopped outbound transfers of cash that were permitted by Chinese law, a move to reduce capital flight.
China under Communist Party rule cannot allow free convertibility. Beijing's economic model is dependent on cheap cash for state enterprises and state banks, which means the central bank severely depresses interest rates on deposits. If depositors had a choice, they would chase higher returns outside China. The country could not withstand the resulting stampede of cash leaving.
At the moment, cash is desperately trying to leave. The debt crisis—Beijing has accumulated debt in an amount equal to, say, 350% of gross domestic product—looks as if it will take China down. Evergrande Group and many other large property developers are defaulting on obligations; homeowners across the country are participating in the "mortgage boycott," refusing to pay banks on loans for apartments; suppliers to property developers are similarly refusing to pay bank loans; and banks are unable to honor deposits so depositors are protesting in the streets. As a result, foreign investors are withdrawing money from the bond markets, which are imploding. July marked the sixth straight month that money exited the country's bond markets. Who wants to hold a weak Chinese currency that is racing toward the edge of the cliff?
Furthermore, Xi Jinping, the Chinese ruler, believes in "absolute" control of every aspect of society. The idea of free convertibility, therefore, is almost certainly anathema to him. So until China completely abandons its model of economic development and removes Xi as ruler, the renminbi cannot dethrone the dollar. The Chinese failure to make their currency widely acceptable means, as a practical matter, the BRICS currency will never get off the ground.
The Russians and Chinese have been wanting to attack the dollar for decades, but now, despite everything, they see a real opportunity to succeed.
What are the attributes of a global reserve currency? It must be stable, it must be underpinned by a large and strong economy, it must be freely convertible, and it must be used widely.
Biden's policies undermine these attributes of the American currency. His insane spending plans will eventually weaken the dollar and therefore undercut its attractiveness as a store of value. That spending is made possible by issuing debt. America's national debt is now a staggering $30.64 trillion and climbing fast. Eventually, investors will turn their back on an ailing dollar. No one wants to keep their wealth in a currency constantly losing value.
Moreover, Biden has already pushed the American economy into two quarters of negative growth, a "recession," and his policies seem designed to continue and deepen the downturn.
Also, his imposition of dollar sanctions on Russia undercut one of the main advantages of the greenback: its near-universal acceptance and usability for transactions. As a result, the Chinese and Russians are trying to trade with each other in renminbi. Furthermore, the Chinese are working to get Saudi Arabia to accept the redback in payment of oil.
Meanwhile, Biden looks as if he is trying to kill the dollar. In Beijing and Moscow, they cannot believe their good fortune. An American president is undermining what Tucker Carlson correctly calls a "core American interest": maintaining the dollar's status as the world's reserve currency.
Americans should not remain overconfident. The only reason the greenback is still the world's reserve currency is because there is no practical alternative. China and Russia, however, are busy trying to figure out how to engineer a replacement. That is why they are at this moment pushing for a BRICS currency.
Gordon G. Chang is the author of The Coming Collapse of China, a Gatestone Institute distinguished senior fellow, and a member of its Advisory Board.