De-Dollarisation and the Death of the World Reserve Currency

De-Dollarisation has been gathering momentum in recent years, not least via multiple trades agreements between Russia and China and independently with other nations. However let us focus on a few developments we have seen in the last few months to illustrate that this has become a global phenomenon.

Iran and Pakistan who have signed an agreement to re-establish a banking relationship, denominated in local currencies.

http://www.presstv.ir/Detail/2016/08/31/482534/Iran-Pakistan-banking-dollar-gas-pipeline

“The two sides agreed in principle to open banks accounts in their respective central banks for trade transactions in their local currencies,” an unnamed official at the Pakistani Ministry of Commerce was quoted as saying.

Singapore announced in May that the Monetary Authority of Singapore (MAS) would be including Renminbi (RMB) financial investments as part of its Official Foreign Reserves (OFR) from June 2016 onwards.  This was in recognition of developments in China’s financial markets, and the growing acceptance of RMB assets amongst institutional investors.

South Korea’s finance minister said that his country would start trading with Iran using the Euro on 29th August stating that the move would “greatly resolve obstacles that stood in the way of facilitating investment and trading with Iran.” Interestingly South Korea had previously settled Iranian oil purchases and construction project payments in the South Korean Won. Presumably the ongoing sanctions that the US imposes on Iran meant that trading in US dollars was not feasible. However they may well have decided to opt for de-dollarisation irrespective. What is clear is that nations are finding ways to get around US sanctions and weakening the dollar’s reserve currency grip in the process.

In June the Sierra Leone government expressed a desire to de-dollarise the country’s economy. Their Central Bank Governor, Dr Kaifala Marrah, is the primary backer of this initiative and supported by President Ernest Bai Koroma. A presidential appeal was sent to all users of mobile phone networks in the country saying “I call on fellow Sierra Leoneans to buy, sell, lease, rent, hire and transact all businesses in the Leone. Together we can save our currency, H.E Dr. Ernest Bai Koroma.”

In April, China and Nigeria announced a currency swap agreement. The Nigerian Minister of Finance, Kemi Adeosun, stated that Nigeria would issue panda bonds (denominated in yuan) to assist in their strategy to finance their 2016 budget deficit. Panda bonds are yuan-denominated debt sold by foreign countries and overseas agencies in China. The currency swap deal was seem as a mechanism to strengthen the Naira since Nigerian traders, can execute their transactions in the yuan instead of the dollar.  From a Chinese perspective, this arrangement increases the demand for the yuan.

Nigeria accounted for 8.3% of the total trade volume between China and Africa and 42% of the total trade volume between China and the Economic Community of West African States countries in 2015. This currency swap also helps to bolster Nigeria’s foreign exchange reserves in the face of falling export revenues associated with the weak price of oil.

In April, Hungary became the first Eastern European country to issue a yuan-denominated sovereign bond. The dim-sum bond, was more costly to Hungary than an equivalent deal in U.S. dollars but was seen as evidence that Hungary wanted to expand trade with China and establish Budapest as a yuan hub in Eastern Europe.

In June, Poland became the first European nation to issue yuan-denominated debt in China. Their Ministry of Finance signed a deal with the Bank of China to issue 3-billion yuan worth of panda bonds on the mainland over the next 3-years.

The New Development Bank, formerly known as the BRICS development announced in July that it would issue 3 billion yuan worth of five-year “green bonds” denominated in the Renminbi to raise funds for clean energy and infrastructure projects. Bank of China was mandated as the lead manager on this deal. The People’s Bank of China Shanghai headquarters stated that such bonds issued in the first half of the year reached 75 billion yuan, 33% of the world’s total, quickly establishing China as the world’s largest green bond market.

Finally, freight carriers are refusing to accept dollar payments for cargo that is being shipped to Japan from Singapore, requesting Japanese Yen or South Korean Won instead.

This article provides a small insight into the global de-dollarisation process that has been underway in earnest for the last two years and continues via the dumping of US treasuries, trade agreements, currency swaps and the issuance of yuan-denominated bonds. The ultimate question remains though, when will China announce to the world the issuance of a gold-backed Yuan to be followed by Russia announcing the issuance of a gold-backed Ruble?  Whatever damage ongoing de-dollarisation is doing to the dollar’s reserve currency status, those announcements would be tantamount to a declaration of financial war and would signal the death of the dollar as the world’s reserve currency.

 

 

 

 

 

2 Comments

  1. China will only announce a gold backed yuan when the US$ collapses, as doing it any sooner would facilitate the crash of the dollar sooner, and there would probably severe repercussions for China’s actions.
    Besides the US dollar does not need any help, and is already in decline. The current world wide state finances (USA more specifically) are on a precipice and the recent fine of Duetsche bank for irregularities of $14 billion will rock the banks across the world, but wont save the US, they need another internal currency which is asset backed, silver seems to be the flavour, but that depends on certain interests acquiring the biggest gold producing mine in the world; interesting times to say the least.

    • You got it!!The most laughable thing is that Trump hasn’t a clue even though the top financial people in the US are warning Trump just how serious this is ! This is the most dangerous problem for the US and will be its downfall !!!

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