Article by Kevin Tutani
Recent developments in global trade and finance have led to a shift in the traditional foundations of world economics.
In the past few weeks alone, there have been several enunciations which have pointed to the Chinese Yuan taking dominance and precedence over the US dollar as a reserve currency and the standard currency for international trade, in some regions.
Russia, a major oil producer which traditionally provided more than 33% of Europe’s oil imports, announced that it would be accepting payments for its oil in the Yuan from countries in Africa, Asia and Latin America.
This may be Russia’s Trojan horse, for China to market their oil on the African continent and the other targeted regions for Russia’s own benefit but it will give the Yuan the prize of being viewed as a powerful US dollar alternative on the international market.
Of course, Russia is prioritising payments in its own Ruble for oil sales to most of Europe and countries that they have designated as unfriendly nations. This is in order to keep the demand for their own currency high so that it retains value on the international foreign exchange market. Resultantly, the Russian Ruble was one of the best-performing currencies in the world for the year 2022. For instance, it gained nearly 30% against the US dollar by the end of September 2022.
In addition to Russia accepting Yuan payments, France, for the first time, in breaking with traditional payments protocol, paid for a shipment of LNG gas from China in Yuan, at the end of last month. Other countries which have diverted from orthodox US dollar payments to settle for the Yuan are Brazil, which has an official agreement to trade with China in their respective local currencies and Saudi Arabia, the largest oil producer, which has indicated its willingness to accept Yuan payments for oil, since January this year.
Recent developments by the Saudi monarchy to join the Shanghai Cooperation Organization (SCO) have affirmed the commitment of the Saudis to make good on their consideration to accept payments for their natural resource in Chinese currency. It is evident that there is a new trend whereby most emerging markets are recalling the use of the dollar in international payments and substituting it with their own local currencies or the Yuan. Other countries following this trend include Argentina, India, ASEAN member states of Singapore, Thailand, Philippines, Malaysia, etc.
In the case of India, the country has negotiated a facility where it is purchasing Russian oil in its local Rupee currency. To their advantage, they will be acquiring the oil at discounted prices and this will also go a considerable length towards strengthening the Indian Rupee.
A priority trading bloc called BRICS, consisting of Brazil, Russia, India, China and South Africa, has recently been reported to be working on an alternative currency to the US dollar, which will reportedly be backed by resources such as gold and lithium. China may take advantage of this new framework and propose its Yuan to work parallel to the common currency as it is the world’s largest manufacturer and also the largest global exporter. By virtue of dominating manufacturing and exports globally, it becomes feasible to use the Yuan as the main BRICS currency or to allow it to work in tandem with the eventual established common currency.
In layman’s terms, this means that it makes sense for any country to have the Yuan as a reserve currency as China’s exports have the largest global demand. The moves to replace the dollar are becoming more justifiable since the dollar is merely a fiat currency which is not backed by resources. The US dollar has benefitted massively from being a non-resource-backed currency as there has always been a demand for it by central banks and governments across the world who used it as a reserve currency and also as the main currency for the settlement of international trade payments. Some analysts used to describe the world as being a sponge for the US dollar, such that excess printing of the dollar would not cause sharp inflation in the US or its depreciation. There were always countries and firms eager to take up excess dollars in the market and that would avert a case of too much liquidity, causing inflation in the U.S.
Unfortunately, the USA has failed to protect the integrity of its currency by persistent excessive printing of the same by their central bank (Federal Reserve Bank) and unfettered government borrowing. The Federal Reserve has grown its balance sheet by adding USD $7 trillion in assets (credit issuance to banks and other economic players) as a result of massive cash printing mainly directed at bailing out failing banks within the United States, in the past 17 years alone.
Regardless of their efforts, notable U.S banks continue to collapse and there is a possibility that the situation might continue to escalate to a level where economic growth is hindered and the persistent inflation in their market cannot be tamed. With the U.S. losing its position as the largest economy globally, by PPP (Purchasing Power Parity), and inflation pursuing their local economy, the dollar will begin to lose its status as a viable reserve currency of choice. China is managing its inflation better than the U.S. and has become the largest economy according to PPP.
Core inflation is at between 1.6% to 2.9% for the past 12 months in China whilst the annual Consumer Price Index for February in The U.S. is standing at 6%. Moreover, China is forecast to continue its growth trajectory and will exceed The U.S. in nominal GDP terms by 2035. These are some key drivers that will fuel the gradual growth of the Yuan, of course, at the expense of the dollar. Going beyond the excesses of The Fed (Federal Reserve Bank), the U.S. government has gone to grow its debt by a staggering USD$ 23 trillion, in the same 17-year period. These excesses are at the centre of the vulnerability of the US dollar. Additionally, the global political tensions between the U.S. and its rivals have been the latest source of the need for mechanisms to replace the US dollar with workable alternatives.
On the African continent, with South Africa being a member of BRICS, there is a possibility that the changes occurring in international finance and trade will provide a channel for South Africa to also make payments to China in Yuan or a common BRICS currency. Zimbabwe on the same note finds South Africa as its largest trading partner and by inference, there is the probability that the country may eventually settle some payments in Yuan as well. China ranks as Zimbabwe’s third largest trading partner and this may settle whether it is far-fetched or feasible for Zimbabwe to have the initiative and set up an inquiry into Yuan payments and apply to join BRICS as a contingency alternative to the US dollar-denominated international trade and international monetary architecture.
There are notable challenges which stand mainly in the way of South Africa, which will make it difficult to add the Yuan to their respective payments system, with ease. The main challenge is that the key trading partners of South Africa are European countries. Thus, South Africa has a vital association with BRICS which is largely a political resemblance but it has to impute measures towards growing trade with BRICS nations so as to make a Yuan payments system workable. It is therefore advisable for trade missions between BRICS member states to make more frequent visits to each other and establish ways to create demand for substitutes of European products which currently constitute the greater share of imports and exports for South Africa and other BRICS countries.
For instance, South Africa may begin to purchase its petroleum products exclusively from Russia and at discounted prices. Additionally, with Zimbabwe’s principal imports being dominated by fuel and petroleum products, the country can follow the same strategy. As it stands, the Northern African region is currently purchasing considerable petroleum products from Russia and the latter is aggressively seeking to establish oil markets on the whole African continent.
A handful of other countries have also shown interest in joining BRICS and this should give more leverage to the bloc and influence globally. These countries are Saudi Arabia, Iran, Indonesia, Nigeria, etc. It is on this basis that Zimbabwe should prepare to start formal inquiries on whether it should also apply to join this important trading bloc. The population of the expanded BRICS bloc, which some are already referring to as BRICS+, will make it the largest trading bloc in the world and the consistently growing economies of the member states will render it the most powerful bloc by GDP measure. With these changing dynamics in international trade and international finance, countries such as Zimbabwe need to acclimatize to eventualities and advantages that may arise from joining BRICS so that they may negotiate favourable trading terms and have useful templates to follow when making decisions which have the most suitable bearing on the foreign interests of the country.
In conclusion, it is reasonable to suggest that the full impact of the introduction of the Chinese Yuan and alternative currencies to the previous framework which was dominated by the US dollar, may be appreciated in the long term (between 5 to 10 years). The efficiency with which these new payment alternatives can be launched, used and embraced will work to the advantage of the Yuan and its alternative peers. With China already the world’s largest economy according to the more realistic measure of Purchasing Power Parity (PPP), the odds point to a growing influence of the Yuan.
It can only be prudent for smaller economies to observe and participate in this growth for their own respective economic benefits.
Kevin Tutani is a political economy analyst.
The views expressed in this article are those of the writer and do not necessarily represent those of the Zimbabwe Broadcasting Corporation.