US Dollar Now Used In Less Than Half Of China-Russia Trade

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It’s an old theme but national trade elsewhere is diminishing US dollar use longer term 

Op/Ed by Chris Devonshire-Ellis 

Russia and China have successfully managed to reduce the use of the US dollar in their bilateral trade dealings. It now accounts for just 46% of all bilateral trade in Q1 this year, down from 90% in 2015.

The financial trade balance has moved to use of the Euro at 30% and a combination of the Yuan and Ruble for the remaining 24%.

Presidents Putin and Xi penned an agreement to move away from the dollar in bilateral transactions in favour of national currencies – the ruble and yuan – in June this year. The decline of dollar usage, at least in this pairing, seems set to continue.

Analysts US Dollar Warnings

With the United States set to double down on its fiscal stimulus to boost economic recovery from the coronavirus pandemic and the actions of the Federal Reserve, there is a growing risk of a sudden loss of confidence in the US dollar, cautioned Zhu Min, a Chinese economist who was deputy managing director of the IMF from 2011 to 2016.

“The concern isn’t whether the US dollar will see an accumulated decline of 30 percent in the future, but whether there will be a blow-up event that causes a sudden loss of confidence in the US dollar, and its market to collapse”, said Zhu, who is currently head of the National Financial Research Institute at Tsinghua University in Beijing.

Stephen Roach, former chairman of Morgan Stanley Asia, has predicted a looming dollar crash, reported Bloomberg, in a report also carried by Sputnik. “The US economy has been afflicted with some significant macro imbalances for a long time, namely a very low domestic savings rate and a chronic current account deficit”, he said, forecasting that the dollar would plummet 35 percent against other major currencies.

Digital Currencies

Both China and Russia have also moved ahead with trialing digital currencies and these are already in use in selected cities as pilot schemes in both countries. We wrote about Russia’s moves to digitlise the Ruble in the article Digital Currencies To Be Permitted In Russia From 2021 and about China’s plans for the Digital Yuan and its BSN Network in the article Digital Yuan On Track To Replace The US$ In China Trade. The BRICS nations, who are expected to account for 50% of all global trade by 2030 are already developing their own digital currency without the need to transact via US banking networks.

Debt Versus Assets & Payment Networks

The United States is somewhat coy about its debt financing of the US dollar, which works as long as major trade partners buy into it. However, the recent use of the US dollar and US controlled payment networks such as CHIPS and SWIFT as a trade weapon has created increasing alarm and a lack of confidence in US dollar usage in both China and Russia, and this is now spreading to Iran, Turkey, Brazil, India and other major nations. There are calls for returns to asset backed currencies, while the security of digital is attractive to both banks and consumers.

China and Russia are already developing their own global transaction networks which have two advantages – Russia’s massive commodity reserves and lack of debt, and China’s huge consumer population. In time, these have the potential to dwarf the existing networks if the two countries can agree on controlling it.

Clearly, movement against the US dollar is gathering pace. In a sign of the times, even US investors have started buying Gold as opposed to debt, which is an odd patriotic commitment to a nation that has been off the Gold standard since 1971. It will take a very steady hand to see the US dollar out of the Covid-19 pandemic, through a massive US recession and to gain credibility back among the huge block of countries that Washington has managed to persuade that the US dollar cannot be completely trusted.

A combination of global disease, falling markets, political desire and new digital technologies all swimming away from US dollar debt is not a good sign of things ahead. Which is why options are being created.

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