China and Russia are working together to reduce their dependence on the US dollar. Trade arrangements in USD between the two countries have fallen below 50% for the first time.
De-dollarization in Russia and China
The share of the dollar in trade between Russia and China was only 46% of the settlements in the first quarter, the Financial Times reported on Monday, citing recent data from the Central Bank of Russia and the Federal Customs Service. This was the first time that the use of the US dollar for trade regulation fell below 50%. The euro, on the other hand, represents 30% of all deposits and the national currency 24% – both of which are total.
Since the inception of the Bretton Woods system, the US dollar has been used as a medium for international trade. In recent years, however, a number of countries, including some G20 countries, have switched to trading in national currencies.
Russia and China have been trying for several years to reduce their use of the US dollar in trade regulation. In 2015, about 90% of their bilateral transactions were executed in USD, but that figure fell to 51% last year, the publication went through.
Alexey Maslov, director of the Institute of Far Eastern Studies at the Russian Academy of Sciences, told the Nikkei Asian Review that the “de-dollarization” of Russia-China was a “breakthrough moment.” He believes it could elevate the two countries’ relationship to a de facto alliance. “Many expected this to be a military alliance rather than a trade alliance,” the director elaborated. “But now the alliance is moving more in the banking and financial direction, and that is what can guarantee independence for both countries.”
ING Bank’s chief economist for Russia, Dmitry Dolgin, was quoted as saying:
Every wire transaction that takes place in the world in which US dollars are traded is cleared at some point through a US bank. That means the US government can tell that bank to release certain transactions.
The Swift system, which has traditionally been used for trade regulation, is overwhelmingly controlled by the US, so many countries are trying to construct their own alternative payment systems. For example, in 2015 China launched a cross-border payment system for banks.
Global de-dollarization policies include sharply reducing US debt burden, lowering the status of the US dollar as an anchor currency, increasing non-dollar bulk commodity trading, reserving non-dollar currency appreciation, and the appreciation of gold against the dollar, ”Wang Wen, a professor and executive dean of the Chongyang Institute for Financial Studies at Renmin University of China, explained in an article he wrote in Global Times.
Zhang Xin, a researcher at the Center for Russian Studies at Shanghai’s East China Normal University, notes that the Chinese government and major economic entities have recently begun to worry that they could end up in a similar situation to their Russian counterparts. They fear that they could become “the target” of sanctions and “potentially even be shut out of the Swift system,” he explained.
Russia has accumulated renminbi reserves at the expense of the US dollar, the publication said. The Bank of Russia revealed earlier last year that it had reduced its dollar holdings by $ 101 billion, accounting for more than half of its existing dollar holdings. The central bank then increased its share of renminbi of Russia’s foreign exchange reserves from 5% to 15% by investing $ 44 billion in China’s currency.
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