Could this Bank in China Bring an End to the U.S. Dollar’s World Dominance?
Story by Tom O’Connor, Newsweek, 4/13/23
In his first visit to China since taking office at the beginning of this year, Brazilian President Luiz Inácio Lula da Silva called on countries across the globe to ditch the U.S. dollar in favor of trading in a common currency or existing national currencies, something he did in his own trade with Beijing just weeks earlier.
“Every night, I ask myself why all countries are forced to do their trade backed by the dollar?” Lula asked. “Why can’t we do trade backed by our currency?”
Perhaps even more significant than the message Lula delivered was where he delivered it. Lula spoke Thursday at the New Development Bank (NDB), which serves as the Shanghai-based financial institution of the informal BRICS coalition. BRICS, comprised of Brazil, China, India, Russia and South Africa, was first devised some 16 years ago as a vehicle for large emerging economies. But the group has taken on a new life in recent years, with a growing list of nations seeking to forge partnerships.
And though shared geopolitical aims among the five core BRICS members and those seeking to join the expanding group are few, a common goal has increasingly emerged to provide new alternatives to Western-led institutions.
“The NDB is a great example in terms of non-Western multilateral development banks trying to promote an alternative development financing mechanism that is not dominated by the U.S. dollar or by an American standard or Western standard,” Zongyuan Zoe Liu, a fellow at the Council on Foreign Relations, told Newsweek.
Fundamentally, it boils down to two things: money and politics.
On the economic end of the equation, being tied to the U.S. dollar, for all of its glory since the establishment of the Bretton Woods system that linked global currencies to the greenback, costs nations money. Conversion fees take a toll, especially when trade is being conducted in large volumes, as is the case among BRICS members.
“For economic reasons,” Liu said, “if there are ways to reduce transaction costs, to reduce currency or exchange rate risk, then countries are willing to do that.”
For China, in particular, which is the largest trading partner of more than 120 countries, this trend makes sense.
Yaroslav Lissovolik, founder of BRICS+ Analytics and a member of the Russian International Affairs Council, also argued that using national currencies may “be seen by some countries as a way to lower the transactions costs associated with conversions into U.S. dollars, as well as reducing currency mismatches that often accompany high levels of dollarization.”
He also saw motivation among BRICS members toward attempting to close the gap on the U.S., which accounts for around 58% of the world’s foreign exchange reserves, a substantial lead on the European Union euro at about 20%, the Japanese yen at less than 6% and the United Kingdom’s pound sterling at about 5%. The Chinese renminbi comprises just under 3%.
“There may also be a desire by some of the largest developing economies such as China and other BRICS countries to emulate the dollar’s success by reaping the benefits of attaining a reserve currency status for their respective currencies,” Lissovolik told Newsweek. “The overall pie of potential de-dollarization dividends (given the ‘exorbitant privilege’ of the dollar in the preceding decades) is substantial and some of the largest developing countries may well aim for getting a chunk of this pie.”
And while this aim may be tantalizing, he felt the major benefit of the NDB came in the form of diversifying options for nations in receiving development assistance.