Late last month, Argentina faced a familiar problem. The South American country is struggling to repay $2.7 billion of the IMF’s latest $44 billion bailout package.

However, this solution is unconventional. Buenos Aires is partly settled in yuan due to a deficit in its net dollar reserves. “Argentina will not pay with a dollar in its reserves,” said Economy Minister Sergio Massa proudly.

This is the second yuan transfer from Argentina to the IMF. “These are signs that broader changes are taking place in the international financial system and that they are set to become permanent,” said a senior official at Argentina’s economy ministry. “These shifts will take time, but they will not be reversed.”

On the other side of the world, Bangladesh also chose to use the yuan to solve a problem it encountered in April: how to pay Russia for its nuclear power plant. Dollars were not an option due to US sanctions, and ruble payments were not feasible for Dhaka, so both countries opted for the yuan.

Developing economies have long resented the dollar’s dominance in international trade and finance, especially since the United States’ share of the global economy has more than halved since World War II and China, India and The rise of new powers such as Brazil.

Economists say “de-dollarization” has been the focus of anti-imperialism for decades, but the overwhelming power of the dollar meant that until recently it was a mere slogan.

Sergio Massa, Minister of Economy of Argentina
Argentina’s Economy Minister Sergio Massa said Argentina “would not use a dollar” to repay the IMF loan © Nathan Howard/Bloomberg

But with the expansion of U.S. economic sanctions and the explosion of new technologies for international payments, cracks are beginning to appear in the dollar’s once impregnable status. China embraces the digital yuan and works to develop an alternative global payment system, hoping to benefit from it.

The purpose is not to abolish the dollar, but to weaken its dominance — and more importantly, to create enough space for China’s economic survival if the United States imposes sanctions against Russia one day.

“The US uses its financial power as a geopolitical weapon, and dollar hegemony is an important part of that,” said a Chinese official, speaking on condition of anonymity. “If the U.S. imposes sanctions on any developing country through the payment system, we will suffer.”

The US Treasury Department’s Office of Foreign Assets Control (Ofac) list of individuals and entities sanctioned is currently 2,206 pages long, listing more than 12,000 names. Their use has accelerated dramatically over the past decade, as successive U.S. presidents have opted for an apparently low-cost, bloodless solution to foreign policy problems.

“The extraterritoriality implied is horrifying to other governments,” said Christopher Sabatini, a Latin America fellow at Chatham House. “When a quarter of the world’s economy is subject to some form of sanctions, and the threat can be targeted at any country at any time, the game changes.”

Agathe de Marais, author Backfired: How sanctions are reshaping the world, hurting U.S. interests Three key developments are traced: Iran’s ban from joining the Swift global financial information network in 2012, Russia’s economic sanctions following its annexation of Crimea in 2014 (making it the largest country to have been sanctioned to date), and the 2018 The U.S.-China trade war that began in 2009.

“Those three things really accelerated the shift in rogue state thinking . . . away from Western financial mechanisms,” she said.

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Significantly expanded sanctions by the West are not only unnerving authoritarian states. They also anger emerging powers such as Brazil, which believe that the international financial system should not be weaponized.

Celso Amorim, senior foreign policy aide to Brazilian President Luiz Inácio Lula da Silva, told the Financial Times: “There is a lot of discomfort in the dollar-based international financial system today. “The main factor behind this is sanctions.”

Eswar Prasad, a professor at Cornell University, agrees that “virtually every country in the world, including America’s competitors and traditional allies, is very keen to abandon the dollar-denominated financial system”, although he Pointing out this is not trivial.

The difficulty for emerging powers in finding alternatives is that the dollar is deeply integrated into the international financial system. Economists have long argued that the “network effects” of such broad dominance would defeat any attempt to replace the dollar. But across the financial system, China has been undermining the dollar and offering its own alternatives.

Beijing is focused on gradually reducing the power of Belgium’s Swift, the global platform through which some 90 per cent of cross-border money flows are arranged. Analysts said that China’s strategy to achieve this goal is multi-pronged and persistent, and has begun to show important results.

Customers use the digital yuan to make purchases at a cafe in Beijing
A customer makes a purchase using the digital yuan at a cafe in Beijing © Simon Song/SCMP/Zuma/Alamy

One aspect is to build a larger RMB liquidity pool in the offshore capital market to increase the supply of RMB to traders and investors.

The other is the establishment of the Cross-Border Interbank Payment System (Cips), China’s competitor to Chips, the world’s largest private-sector dollar clearing and settlement system, and Swift. In 2022, the total settlement volume of Cips jumped by more than one-fifth to 970,000 RMB.

Other trends include the international rollout of the digital yuan, which allows transactions without going through Chips or Swift.

“It’s going to be a completely different system . . . completely divorced from Western financial regulators,” said Zongyuan Zoe Liu of the Council on Foreign Relations in New York.

“Electronic yuan combined with Cips will be a powerful force against Western sanctions because in order to trigger sanctions (U.S. authorities) must know about the transaction.”

China’s desire to promote its own currency is hampered by the fact that the renminbi is not fully convertible. Still, the renminbi overtook the U.S. dollar in March as the most-used currency for cross-border payments in China, according to China’s State Administration of Foreign Exchange.

Stephen Jen, a former currency expert at Morgan Stanley, said in an April report that the dollar is losing its international reserve status much faster than generally accepted. Adjusted for exchange rate movements, its share of global reserves has fallen from 73% in 2001 to 58% in 2023, he said.

Despite signs of real progress, other analysts warn that Beijing is still years away from breaking its dream of dollar “hegemony”.

In December last year, President Xi Jinping and Crown Prince Mohammed bin Salman visited Saudi Arabia
President Xi Jinping with Saudi Arabia’s Crown Prince Mohammed bin Salman last year. He told Gulf Arab leaders he would like to see the yuan used for oil and gas trade © Royal Court of Saudi Arabia/Anadolu/Getty Images

One such success has been in the offshore capital market. Cross-border debt denominated in yuan has boomed this year, with “Panda bonds” issued by foreign issuers rising to 75 billion yuan ($10.4 billion) so far, already surpassing the 2021 record, according to Chinese data provider Wind. annual record.

According to data from Bloomberg, the issuance of RMB “dim sum” bonds in Hong Kong also hit a new high in the same period, exceeding 320 billion yuan.

In an energy market where pricing in dollars is the global norm, President Xi Jinping told Gulf Arab leaders at a summit in Saudi Arabia in December that he wanted to see the yuan used for oil and gas transactions. In March, China National Petroleum Corporation and France’s Total reached the first LNG transaction settled in RMB on the Shanghai Stock Exchange.

Emerging countries are also rapidly making progress with digital payment systems such as China’s WeChat Pay, India’s Unified Payments Interface (UPI), Brazil’s Pix or Kenya’s mobile money service M-Pesa.

The Rise of the Middle Powers

This is the final installment in a series on how the US-China standoff is ushering in a new era of opportunity for countries around the world
part 1: The à la carte world: our new geopolitical era
part 2: China’s Blueprint for an Alternative World Order
Part 3: UAE and Saudi Arabia – Gulf Powers
Part 4: China Uses U.S. Sanctions to Topple the Dollar

The West is lagging behind, the US and Europe are still investigating the possibility of digital currencies, and the payment system is still dominated by Visa and Mastercard.

“China has pilot projects with Thailand and the United Arab Emirates to settle bilateral trade in electronic renminbi,” Demarais said. “This is a clear case of countries using technology to pre-empt sanctions, and China really wants to have a first-mover advantage.”

Few believe the dollar could fall from its highs anytime soon. But they do see an increasingly fragmented international financial system, with the yuan playing a bigger role. All this will satisfy the emerging power’s desire for diversification.

“It’s not that the dollar has lost its place as the world’s top currency,” said Daniel McDowell, a professor at Syracuse University. “But I do believe there are risks to U.S. power, especially the ability to impose sanctions on China.”

Additional reporting by Andres Schipani in Lima and Hudson Lockett in Hong Kong


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