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Brazil, China Ditching US Dollar

Brazil has just reached an agreement with China to abandon the U.S. dollar in paying for trade goods between them. It is the latest win in Beijing’s long-term quest to stamp out the greenback and cement the renminbi as the international dominating currency. 

The agreement, announced on Thursday, has renewed concerns over the U.S. dollar going forward. 

Brazil and China will exchange payments directly, without converting their currencies to the third-parties trusted economy first.

That is the traditional role of a greenback. It became the foundation of the world economy in the aftermath of the Second World War. 

The U.S’s vast economy, strong democracy, and transparent regulatory system soon cemented its reputation as a haven for international investors. 

The U.S. does not seem nearly as socially or economically stable now as it did only ten years ago.

Now more and more nations are scrambling to find alternative financial systems that will isolate them from Washington’s willingness to use sanctions as a political lever. 

Brazil’s trade and investment promotion agency described the new agreement as furthering “greater bilateral trade and investment facilitation” with China. 

But continued rising U.S. dollar values and fallout from the U.S. Federal Reserve Bank’s interest rate moves means that it is also being touted as a cost-cutting initiative. Beijing, though, views moves like this one as a way of insulating itself from international pressure.

U.S. President Joe Biden, asked about China’s potential for rearmament after the catastrophic attempted invasion of Ukraine, said:

“We would impose severe sanctions on anyone” who would arm Russia, US President Joe Biden said. “We would respond.”

Beijing is unamused. 

 “Western countries led by the US have implemented comprehensive containment, encirclement and suppression against us, bringing unprecedented severe challenges to our country’s development,” Chairman Xi Jinping retorted.

Foreign Minister Qin Gang also spoke out: “The US claims it wants to ‘compete to win’ with China, and does not seek conflict. But in fact, the so-called ‘competition’ by the US is all-round containment and suppression, a zero-sum game of life and death.”

World government’s keep reserves of the dollar in order to accelerate global transactions, allowing reserve banks to interfere with currency markets in order to support their currencies. 

Business, tourists, and private investors also find the US dollar’s accessibility, convenience, and reliability appealing when conducting their own transactions.

But sanctions following Ukraines invasion have brought to a screeching halt any such activities by Russian institutions and 10,000 of its oligarchs.

And about 44 countries—including Australia, Canada, Japan, New Zealand, South Korea, and almost the entire European Union—have supported the U.S. moves to punish President Vladimir Putin. 

“Chinese authorities were shocked by the seizure of the Russian central bank’s foreign exchange reserves following the invasion of Ukraine. In the event of a Sino-American conflict, Chinese assets would similarly be vulnerable,” argues Australian Strategic Policy Insitute (ASPI) senior fellow David Uren.

He adds: “American calls for defence of the international rule of law fall on jaded ears among many nations occupying the space between the Western democracies and the authoritarian states of Russia, China, Saudi Arabia, Iran and a few others. Entreats for solidarity are filtered by minds with harsh memories of European seizure and plundering of sovereignty, farmland, mineral wealth, tribal identities and the slave trade from the 15th through the early 20th Century.

Like Australia, Brazil’s largest trading partner is China. It is the destination for a third of Brazil’s exports, and a source for a fifth of its imports. ”

The fact that Chinese currency within Brazil’s remit is only valid to buy Chinese goods is deemed no major issue by Luiz da Silva, the pro-Beijing, newly elected president of Brazil.

After all, Beijing is busy setting up the yuan as a trade currency in other major markets. But the significance of this agreement for Beijing is geopolitical. The Chinese yuan, though, has a ways to go before it can become a preferred reserve currency.

The U.S. dollar accounts for roughly 55 percent of central banks world savings as of 2022. The euro made up around 20 percent, while the Japanese yen made up only six per cent. Like the Australian dollar, the Chinese yuan made up less than five per cent of global public money stocks.

But it was making headway. The U.S. dollar made up 69 percent of the world’s reserve currency in 2007. 

And earlier this year, the Chinese currency, also known as the yuan, moved into fourth place on international payments markets, below the U.S. dollar, euro, and Japanese yen. That is up from 35th place in 2010. 

Central banks around the world invested in more gold last year than in any other since 1987. That is a sign that they are trying to protect the exposure of their domestic currencies to U.S. currencies from swings in the enticing yellow metal.

And, for the first time in decades, the U.S. dollar is experiencing some serious competition. “Joint efforts to decimate the US dollar are also being discussed by Brazil, Russia, India, China, and South Africa, known as the BRICS,” says Atlantic Council senior fellow and Professor of Political Science at the University of Toronto Carla Norrlof.

The BRICs are not an official trade bloc. But members are encouraged to coordinate trade policies and share resources. 

They are also encouraged to avoid the euro, to look for alternatives to the U.S.-dollar-dominated SWIFT secure messaging system that is used by the world’s banks for money transfers.

In 2014, BRIC nations launched a $50-billion New Development Bank to serve as an alternative to the World Bank and International Monetary Fund. They also established common cash reserves to guarantee that members can pay their debts.

Earlier this month, South African Foreign Minister Naledi Pandor told the media that she had 12 new nations that had expressed interest in joining the liquidity union.

But whether or not the Yuan will ultimately succeed depends on President Xi. 

“China has great power aspirations on a wide front,” University of Pretoria economics professor Elsabe Loots argues in The Conversation. “A decade ago, it indicated that it was aspiring to make the yuan the dominant currency in trade, financial transactions and especially as a global reserve currency.”

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