International Currency #2: China's Steps

How is China positioning itself to become the new reserve/international currency? China, writes Way Yuhl, has learned from and copied America.

 

Remember the New Silk Road project (aka Belt and Road), whereby China “financed roads, railways, ports, power plants, and telecommunications networks” across Asia, Africa and Latin America? Well, that’s not entirely about profits from interest on the loans. It is also how China has built financial leverage with much of the developing world. If their infrastructure projects all rely on China, well, they are likely to align/agree with China on economic and financial matters. On a side note, Yuhl mentions the Sri Lanka port that was handed over to China for 99 years when Sri Lanka couldn’t repay. While India’s concern was Chinese presence so close to our borders/waters, the West cited it as an example of Chinese predatory lending (zamindar style). Guess what?

“America used the same mechanism after WWI, converting Britain’s debt dependence into diplomatic concessions and market access throughout the 1920s and 1930s. The mechanism is not new.”

 

In addition, China holds a huge amount of American government bonds. Put differently, that means the US owes a lot of money to China. And so China has a good amount of financial leverage over the US.

 

A key difference in approach is that the US (last time, post World War II) tried to build a common international financial framework including institutions like IMF and World Bank. While that may sound good, it also one-size-fit-all policies were thrust upon countries unsuited for them, which often contributed to poor outcomes. China, on the other hand, is working out customized agreements with different countries. Will that approach be too messy? Time will tell.

 

China has been steadily increasing its gold reserves. While currencies aren’t tied to gold (since the 1970’s), gold still serves as an unofficial indicator of financial stability. Accumulating gold adds trust in China.

 

Next, China is slowly building an alternative payment system for international transactions. Like how UPI interconnected banks across India, the current equivalent international system (for use by countries, not individuals) is called SWIFT. America controls it to a point where they can (and did) kick countries out of it unilaterally. Without access to SWIFT, a country’s ability to pay/receive money from other countries is removed. Biden, for example, did just that when Russia invaded Ukraine. China has been building an alternative called CIPS (Cross-Border Interbank Payment System):

“It connects 1,683 financial institutions across more than 120 countries. CIPS is not a replacement for SWIFT, but it is a functioning parallel system that grows every year, and every institution that joins reduces its dependence on the Western-controlled SWIFT system. It is China’s foot in the door for controlling global trade.”

 

Then there is yuan denominated trade with specific countries. This matters because it reduces the share of the US dollar in certain inter-country transactions. The petrodollar is being chipped at. Slowly, not in a hurry.

 

There are cons to becoming an international currency. So China is hedging its bets by also working on a BRICS currency which may also be more acceptable to a large bloc of growing economies.

 

See the similarities to how the US dollar took over from the British pound? Multiple steps. All long term. No sudden moves. But bit by bit, an alternative system begins to emerge, waiting for a pivotal moment to take over. China has many things going for it – patience and long-term thinking are two of those virtues.