Is this the Renminbi’s Moment?

By Ichiro Suzuki As a war rages in Ukraine, Russia is facing far harsher sanctions that anyone expected. Expulsion from SWIFT and freezing central banks assets have largely cut Russia out of international finance, letting the country hang by a thin thread of energy trades for hard currencies. As Russia’s ally, China does not participate in sanctions, on top of not condemning the invasion. Russia would have to depend increasingly on China not only on trades but also on finance. Debt ratings on Russia have already been cut to the levels well below the threshold of junk (S&P rates Russia CC) with a chance of going down further. Like minded anti-West allies are in sympathy with the Russo - Chinese axis that stands up against the U.S. So Russia is not without friends entirely. Expulsion of Russia from SWIFT gives China a chance to establish a network of international transactions outside of the system dominated by the dollar. Those countries that chose not to condemn Putin would be interested in it. It would be very appealing to autocrats who are contemplating invading their neighbors. While it is technologically possible to create such a system, its reliability is another story. Who would join in such a network on a fully fledged basis other than Russia? None of other countries that consist of the BRICS group has condemned Russia’s aggression. Brazil’s President Bolsanaro idolizes Putin. India has been buying Russian weapons since the days of the Soviet Union, and Prime Minister Modi openly imports Russian crude oil at deep discount to market prices. South Africa still thanks Russia for the USSR’s sympathy toward them when the country was under apartheid sanctions. There are a number of smaller developing countries that lean toward the anti-West alliance. Nonetheless, none of these countries would put its full weight on the system that tries to circumvent the dollar. India is China’s strategic rival and is a member of the anti-Chinese league Quad. Brazil and South Africa do far greater amount of trade with the U.S., the EU, the U.K., and Japan combined than with China and Russia., and their trades would still go through SWIFT. Therefore, a new system would operate totally on inter-developing countries trades centered on China and Russia. Cost of transaction would be uncomfortably high, for instance, on the Russian ruble and Pakistani rupee cross rates that skips the greenback. Or would all these currencies be quoted against the RMB first and then offer cross-rates? In any case, liquidity of such trades would be terribly thin. With all its thinly-disguised ambition to push aside the U.S. dollar as the world’s reserve currency, China is yet to make the RMB a fully floating currency, as mandated by the IMF, over five years after it became a component of the IMF’s special drawing rights (SDR), along with the U.S. dollar, the Euro, the British Pound and the Japanese yen. China simply does not afford to eliminate all the restrictions on the RMB, since doing so would be tantamount to opening a floodgate for the money wanting to get out of China. Small Asian neighbors and developing countries that owe China heavily may accept the RMB as a currency of (grudging) choice in international trade and finance. China may force commodity producers to accept the RMB, taking advantage of its status as the largest customer. (This is 180 degree reversal of Putin requesting the ruble for fossil fuels Russia sells to the West.) But that’s where RMB transactions stop. It is hard to think anyone willingly choose the RMB in transactions that don’t involve China. The RMB’s share of global trade rose to its all time high in February, and it was mere 3.2%. Its share of central banks’ reserve remains less than 5%. With all the headlines and fusses on it all these years, this is as far as the RMB has got. The U.S. dollar became the world’s reserve currency at the Breton Woods Conference in the summer of 1944. By that time, half a century had already passed since the U.S. dethroned Britain as the world’s largest economy near the end of the 19th century. During that half a century, the U.S. had left Britain at a distant second, growing fast in terms of both population and per capita income. After WWI, the U.S. became a de facto leader of the global economy but the greenback was not yet the reserve currency. The world still spent a quarter century before the dollar was ‘officially’ crowned as the reserve currency. By the end of WWII, the greenback was well groomed to serve that role. In contrast to the process of the dollar’s half a century climb, China is way too eager to promote the RMB as well as its economy and even political system. Though it is expected that China overtakes the U.S. as the world’s largest economy perhaps in ten years, this is not a done deal yet. Stretched banking and real estate sectors, that have been drivers of domestic economy in the last quarter century, make one wonder how much is left in them even if they don’t collapse. China’s population has already hit its peak, and population growth is a major component of economic growth, along with productivity. The U.S. was still a young country when it overtook Britain, and its population kept growing robustly both through high birth rate and immigration, in sharp contrast to where China‘s demography stands today. In addition, the Ukraine War is a nail in the coffin on the end of globalization, from which China immensely benefited. De-globalization was already in progress through the Sino-American trade war and COVID-19. The Ukraine war is pushing a move towards two blocks: the suddenly united West and the anti-West. This trend is not a plus, on balance, for China, a major beneficiary in the age of globalization. The Chinese economy certainly would not leave the U.S. behind. Even if the Chinese economy becomes larger than the U.S., it is highly unlikely that the RMB be credible enough by that time. Whatever happens, the RMB would be confined to a limited market share in global trade and it still would not be a free-float currency. An outside risk associated with the RMB is a whim of a dictator. While the People’s Bank of China has been run professionally to have earned considerable respect in the market, you will never know what omnipotent Xi Jinping might do to his central bank. His zeal to bring private corporations to heel has crushed the Chinese tech sector in terms of market value, destroying trillions of RMBs. Such an irrational act was utterly unthinkable until he did it. Putin’s aggression into Ukraine was neither rational nor thinkable, but it still happened. Dictators can do those damages. Such a disaster could happen to the PBOC and the RMB though it sounds unthinkable and irrational at present. Under sanctions, some money has flowed into crypto currencies. Russian oligarch’s choice appears to be the tether, the stable coin whose token in circulation is backed by U.S. Treasury securities. Oligarchs know what is good.


About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.