About the author:
The changing patterns and composition of cross-border trade have long laid foundations for the emergence of "currency multipolarity." The emergence of digital currencies and associated supply chain digitalization in the 2020s adds to these foundations and provides additional capabilities. Combined, these and other related forces are reshaping the global financial architecture and economic system. Historically established patterns of center-periphery relationships are now undergoing transformation. A global system in which the United States has occupied the central position for about a century has undergone profound change, so much so that in a number of aspects, it is no longer conceivable that a single center-periphery configuration remains. Aside from military preponderance, there is some doubt that the US is no longer able to dictate the flow of global value on a unilateral or carte blanche basis.
The progressive emergence of currency multipolarity is one dimension of this systemic decentering. Currency multipolarity denotes a situation in which trade can be increasingly denominated and settled in a range of national currencies. In such an evolving and fluid environment, currency multipolarity is arguably a more accurate and less "loaded" descriptor than the frequently used notion of "dedollarization." Dedollarization certainly points to one aspect of contemporary economic realities, namely the reduced role of the US dollar (USD) in international settlements and, to a lesser extent, in international development finance. However, the notion also tends to imply a change involving a one-for-one replacement, suggesting that another national currency will take its place. Hence, we see the debates about the USD versus the RMB. On the contrary, currency multipolarity speaks to a systemic evolution, in which reduced usage of the USD is one element coupled with the growing use of a range of other national currencies.
Economic digitalization, including the emergence of digital currencies, creates conditions that are conducive to the evolution towards a multi-currency global trading system. In some respects, digitalization is the capstone of a decades-plus process of institutional development, resulting in the progressive design and implementation of an "architecture of currency multipolarity." This alternative system can run in parallel to the existing post-Bretton Woods USD-dominated global financial system. It can function within or adjacent to the existing system, offering trading parties and nations options depending on specific transaction requirements and risk management imperatives.
So, how are we to understand the dynamics at work, and what does the emerging configuration look like?
Money and Systems of Value Flow
It may seem trite, but I will begin with a simple conceptual discussion about the nature and functions of money, otherwise some more detailed reflections later on may not make so much sense.
The analysis starts with the production and trade of goods and services. It is the exchange of goods and services in a system of intensified international division of labor, which gives rise to money's function as a means of payment and circulation. The existence of money is thus intrinsically linked to a system characterized by a social division of labor. The exchange of goods and services takes place across space and time. The time gaps between the different "swaps" that are taking place across a large-scale system, together with the non-coincidence of wants between transacting parties, mean that a fungible medium of exchange is necessary to "plug the gap." This function is fulfilled by money.
By fulfilling the function of means of payment, money is then able to fulfil the other functions, that are ascribed to it by conventional monetary theory. Because money can be exchanged for goods and services, it can therefore be used as a store of value. In fulfilling the medium of exchange function, money, by definition, also acts as a unit of account, providing a standardized measure for evaluating the value of various goods and services. This standardized measure, often referred to as a numeraire, facilitates the exchange of non-fungible items by establishing a common denominator for value comparison.
Money is fundamentally a part of an overall economic system in which value is exchanged. We can think of this as a system of value flows, with goods and services moving in one direction in exchange for money moving in the other. Goods and services are acquired either for direct consumption or as part of a production process. For exchanges to take place, the buyer will need to have sufficient money liquidity to complete the settlement at the agreed time. This liquidity can come from either reserves or loans. Without access to the relevant settlement currency, the transaction would fail.
In large-scale complex economic systems with innumerable transactions happening continuously, money remains in constant circulation as long as goods and services are in motion. However, some agents, such as enterprises or households, may accumulate money over time instead of using it immediately. Money is, therefore, temporarily removed from the circuits of production and exchange. When this takes place, money "out of circulation" enters new networks by way of deposits, investments in fixed capital, or purchasing financial instruments and other forms of securities.
Hoarded money forms deposits in savings institutions. As deposits, money is leveraged by lending institutions to create new supplies of money through fractionalized lending. Credit is the creation of a new money supply. Deployed through investment instruments, money is exchanged for securities such as mortgages, ownership, assets, or some other forms of fictitious capital. Fictitious capital is a legally enforceable claim on future value. Government bonds, corporate bonds, company shares, units in a unit trust, commodity futures, etc., are all forms of fictitious capital. Fictitious capital can be exchanged prior to its potential realization through the mechanisms of productive valorization. The ability to exchange fictitious capital is the condition precedent of speculation.
Because value flows through trade are perpetual and dynamic, systemic balance is continually calibrated through movements in liquidity via networks of fictitious capital. These networks are usually associated with deep and broad markets through which such securities can be readily exchanged for money. When this happens, money can then be committed to fixed capital investment or re-enter the circulation of commodities as a means of payment.
USD Hegemony
The USD has fulfilled the role of international numeraire since the Bretton Woods accord in 1944. While the British pound continued to play an important role in international trade settlements amongst members of the Commonwealth in the immediate post-World War II years, the global system progressively evolved towards what became euphemistically described as a USD hegemony. Central banks have maintained large reserves of USD to facilitate the settlement of trade accounts, when companies in those countries imported goods and services from America and elsewhere.
The relevance of the USD to the global system has been underpinned by the historic strength of the US as a producer of goods and services. However, over the past four decades, the US has become a trade deficit nation, with China surpassing it as a global manufacturing powerhouse.1
The US now finances its imports through the issuance of new money and the circulation of USD from creditor nations through US Treasuries. The US has been able to use USD to settle its imports in most, if not all, cases historically. The second pillar for USD hegemony has been how USD flows through the global military economy, by way of (a) US military bases in third-party countries (funded with USD, which is then recycled in the "host" country into the local currency, and then via central banks into US Treasuries), and (b) the sale of American arms, which must be settled in USD. Vendor finance is often provided in these cases, via lend-lease schemes, whereby the buyer is required to repay the vendor loan in USD. The third pillar is that the USD has been, since the mid-1970s, the only currency that could be used for the purchase of oil from the Middle East (West Asia). As oil is a necessity for all economies, countries have had to secure and maintain USD reserves to settle accounts for the purchase of oil.2 This became known as the "petrodollar."
As the US became a trade debtor nation, other nations began to accumulate large volumes of USD. These surplus reserves are either held as reserves or recycled by way of fixed capital investments or the purchase of fictitious capital instruments denominated in USD, such as US Treasuries or Government bonds, on which a coupon rate is earned. Trade creditor nations are lending USD back to the United States.
This system of international circulation is supported by an interbank messaging system, known as SWIFT. SWIFT is a communications standard that supports the exchange of messages between banks to make ledger adjustments as required. Unless these messages can be sent and received, the settlement of accounts using whatever currency is agreed would not be possible.
The ubiquity of the USD in cross-border settlements was premised on the petrodollar regime and the need for countries to accumulate USD to settle USD-denominated debts. This was the case not only for defense procurement-related debts, but also for development finance for many developing nations, often denominated in USD and provided by global finance agencies. Access to SWIFT was a necessary condition of USD utility.
Declining USD Reserves
These conditions have now begun to erode. The unilateral weaponization of the USD and associated institutions by way of sanctions, freezing of assets, and prohibition from use of the SWIFT messaging platform has increased the risk of holding USD reserves. As a store of value, a currency has "value in potentia" only if the risk of not being able to put it into circulation in the future is negligible to non-existent. As soon as there is a risk that dormant currencies could be confiscated or blocked from entering value exchange circulation systems, there are understandable reasons to reduce one's holdings of that particular store of value. The evidence shows a progressive decline in the holdings of USD by central banks around the world.3
The decline is not a singular event, but a gradual ebbing of system dominance. Given the stock of USD within the global financial system, the United States' ongoing significance in trade, and the centrality of US fictitious capital in global networks, it is unlikely that dedollarization would manifest as a singular "big bang" event. Instead, it is part of a gradual process within currency multipolarity.
One piece of evidence is the decreasing proportion of central bank reserve holdings held in USD as noted. Another dimension is the changing nature of the cross-border exchange of commodities, whereby transacting parties are increasingly exploring the use of non-USD or national currencies to settle the trade. The use of China's RMB now accounts for almost 6% of global trade settlements,4 a near-tripling from September 2020.5 This is a remarkable expansion in such a brief period. We have also seen a near-complete dedollarization of trade involving Russia since sanctions were imposed in early 2022. Almost all of Russia's trade is now settled in ruble, yuan, and rupee amongst other currencies. The catalyst of this change was, of course, sanctions; but the material foundations that make the use of national currencies possible are actually the underlying flow of commodities and services. Russia's trade has not slowed down since the sanctions. As more national currencies enter into circulation, this will likely catalyze new value flows in goods and services in which these currencies act as means of payment and circulation. In other words, expanded flows of commodities and services amongst countries create the material conditions that enable the emergence of expanded use of non-USD payments.
Dimensions of Currency Multipolarity
The ability for nations to engage in expanded non-USD cross-border settlements is made possible by an array of infrastructure that has emerged over the past decade or so.
The first of these is the establishment of a network of bank-to-bank bilateral swap arrangements. This ensures the availability of liquidity in the requisite national currencies to enable settlements to take place. For example, the People's Bank of China (PBC) has established bilateral currency swap agreements with over 40 foreign central banks or monetary authorities. Of these, 31 are active with cumulative volumes in play of around 4.16 trillion yuan (about 586 billion USD).6 Such swap agreements have been progressively put into place as a risk mitigation reaction to the global financial crisis of 2008. Indeed, currency liquidity arrangements were implemented across Asia after the Asian financial crisis of 1997 to mitigate against future exposure to USD foreign exchange risks.
Bilateral swap arrangements are buttressed by the development of alternative interbank messaging systems or settlement platforms as alternatives to SWIFT. China, Russia, India, and others have developed their own messaging and payment platforms. Transactions messaged across these alternative networks are not tracked on SWIFT, so precise data on their impact is yet unavailable.
We are now seeing the emergence of digital currencies. There are over 100 central bank digital currency (CBDC) projects taking place globally, at various stages of development and maturity.7 China's digital RMB initiative is one of the most advanced, having been in active "real life" trial deployment for the past few years and now being recognized as part of the official money supply, being accounted for in M0. The future rollout of the digital RMB will take place within the context of this monetary policy envelope. Digitalization makes cross-border interoperability a more efficient and lower-cost possibility. Aside from censorship risks, one of the bitter complaints about SWIFT is related to the cost and elapsed time for payment finality. Digitalization holds the potential to drive transaction costs down to near-zero, and settlements can in theory be instantaneous.
Digital currencies have other attributes that can play important roles in cross-border trade settlements. They can, for instance, be programmed at either the currency or wallet level, depending on the specific technical design. Programmable means of payment can support streamlined trade settlements as well as buttress supply chain integrity by aligning payments with compliant data conditions and mitigate against money laundering and other illegal practices.
As noted earlier, the flow of money is the counterpart to the flow of goods and services. Funds are released when transaction conditions are satisfied, which are essentially information or data points. Historically, these conditions have been captured in physical form like reports and trade documents, but digitalization allows for secure, multiparty access to this information. Digitalized supply chain data, collected, validated, stored, and shared in the context of distributed ledger platforms such as blockchains, can be queried to drive financial settlements or supply chain payment drawdowns. The satisfaction of specified data performance conditions can trigger automated actions, including payments. If the flow of funds is the counterpart to the flow of goods and services, the connector is the flow of information. Efficient data flows can expedite the flow of money and reduce the total stock of capital required to drive the production-circulation system at large. My own case studies suggest that savings of at least 18% in the total circulation of money could be achieved through improved information flows.
China is a global leader in the application of blockchain technologies to supply chain data systems.8 The beauty of such systems is that they are, by design, consensus-driven and resistant to capricious censorship by single actors, offering a stark alternative to the USD SWIFT system that dominated global trade for decades.
Furthermore, all founding member countries of BRICS are well advanced with their respective CBDC initiatives. They have also agreed that a BRICS payments system, utilizing national currencies, will be a key project in 2024. Digitalization in many ways makes national currency-based systems easier to operate, as an agreed numeraire and adjustment mechanism can be digitized and supported via algorithms. This enables real-time calculations of equivalence, reducing foreign exchange risk.
Fictitious Capital and Finance for the Real World
So far, the discussion has focused on national currency-denominated trade settlements, but there is also a need for mechanisms to address non-circulating currencies. I will leave the issue of imbalances aside for this essay, and simply conclude with a short discussion on new capital markets for the circulation of money when not engaged in the settlement of trade.
Accumulated currencies can be held dormant or circulated via investment in fixed capital or fictitious capital. Fictitious capital circuits have been dominated by US instruments and markets backed up by European markets. However, over the past two decades, Asian capital markets have grown to replace those of Europe as critical platforms for the channeling of financial capital. Asian capital markets, including China, Japan, and Korea, have distinct characteristics from those of the transatlantic capital markets.9 These differences are mainly to do with the fact that Asian capital markets are much more aligned to state policy-driven priorities, such as industry development.
The policy-driven nature of Asian capital markets can be said to focus on the integration of capital circuits with the dynamics of the so-called "real economy." That markets for fictitious capital are prone to significant speculation has raised concerns about the extent to which monetized wealth creation through fictitious capital speculation is detached from the valorization possibilities of the real economy. It is often argued that these constraints limit the value of national currencies, like the RMB, because of their limited or restricted convertibility. The inability to freely trade RMB is raised as one reason why the RMB could never replace the USD.
My argument would suggest that this is something of a moot point. Firstly, the system changes are not seeing a like-for-like replacement of the USD by one other national currency. Secondly, a digitalized world makes cross-border settlements in national currencies - without an intermediating currency as numeraire - a low-cost possibility. There is no need for the USD as such to enable an exchange of equivalence to take place. Because of these conditions, should any country accumulate a large proportion of a particular country's currency, the question is how is this circulated outside of the movement of goods and services? A case in point could be, for example, Saudi Arabia progressively receiving more RMB as RMB-denominated purchases of oil grow into the future. What would Saudi Arabia do with its RMB reserves, should they exceed their import requirements from China?
Institutional and financial product reforms are addressing challenges like these. The Shanghai Stock Exchange and the Saudi Tadawul Group (STG) announced a cooperation memorandum of understanding (MOU) on September 3, 2023, to explore "opportunities in cross-listing, fintech, ESG, data exchange, and research, as well as promote diversity and inclusion in both markets." The partnership will also "facilitate knowledge sharing in listing businesses, dual-listings of exchange-traded funds (ETFs), and investor relations initiatives, while developing the infrastructure of both capital markets."10 The Shenzhen Stock Exchange has also entered into a similar collaboration agreement with the STG.11 This is not the only such agreement to enable cross-jurisdiction capital market alignments, which would support a policy-driven flow of finance across jurisdictions as the balancing mechanism for trade surpluses. The Hong Kong Stock Exchange is also collaborating with a number of exchanges in West Asia. 12
The growth of the Chinese government bonds market is another piece of the puzzle, with the bonds specifically earmarked for funds to be used in specific real economy activities. Lastly, ongoing reforms in China's pension, financial services, and wealth management sectors are likely to contribute to the creation of instruments aligned with the circulation needs of national currencies (especially the RMB) as a means of payment in international trade.
Concluding Thoughts
This essay has only scratched the surface, but has outlined some of the key issues and dynamics that are part and parcel of the evolution of the global economic system. While the digitalization of currencies is an important feature, I have decided to situate this aspect within a broader context. The issues at stake aren't about technology per se, though technology can often make certain forms of institutions easier or more efficient. This is certainly the case with the growing use of national currencies in cross-border trade settlements.
The transformation of the global economic system is less about the replacement of one center with another. Rather, the dynamics at work, I would suggest, point to a system decentering. Decades of transformation in trade flows and the emergence of China as the world's "sole manufacturing superpower" have presaged the decentering of the US.13 The legacy of USD primacy is progressively ebbing. The risks of dependency on a currency and settlements system prone to capricious unilateral sanctioning are high and growing. A shift to national currencies is seen as a bulwark against these risks.
A maturing architecture of currency multipolarity is emerging. The critical pieces are already in place: bilateral swap agreements, bank-to-bank messaging or payments systems separate from SWIFT, digital currency platforms, and a growing array of fintech solutions in supply chains that exist today. Ongoing institutional development and cross-border alignment to support capital flows is also an emerging feature of today's landscape. As countries use currencies other than USD for trade settlements, alternative capital circuits will be needed. The Asian experience suggests that these circuits and markets are likely to be more "policy-driven," with alignments to the priorities of the real economy over the speculative imperatives of finance capital.
1. Brian Reinbold and Yi Wen, "Historical US Trade Deficits," Economic Synopses 2019, no. 13 (January 1, 2019), https://doi.org/10.20955/es.2019.13.
2. According to current OPEC estimates, 79.5% (1,243.52 billion barrels) of the world's proven oil reserves are located in OPEC member countries, with the bulk of OPEC oil reserves in the Middle East, amounting to 67.2% of the OPEC total. See: "OPEC Share of World Crude Oil Reserves, 2022," OPEC, accessed April 16, 2024, https://www.opec.org/opec_web/en/data_graphs/330.htm.
3. Alexandros Mandilaras, "Why the World Is Turning Away from the US Dollar," The Conversation, January 12, 2024, https://theconversation.com/why-the-world-is-turning-away-from-the-us-dollar-220093.
4. "China Cross-Border RMB Settlement: Accumulation: Trade," CEIC, accessed April 16, 2024, https://www.ceicdata.com/en/china/crossborder-rmb-settlement/crossborder-rmb-settlement-accumulation-trade.
5. Phyllis Papadavid, "The Renminbi Overtakes the Euro as a Trade Settlement Currency as Its Use in Global Trade Finance Accelerates," Asia House, October 26, 2023, https://asiahouse.org/research_posts/the-renminbi-overtakes-the-euro-as-a-trade-settlement-currency-as-its-use-in-global-trade-finance-accelerates/.
6. "China's Central Bank Signs 40 Currency Swap Agreements with Foreign Counterparts," Xinhua, February 16, 2024, https://english.news.cn/20240216/3df9352a2bcf4d9f8bdd317233fd321e/c.html.
7. "Today's Central Bank Digital Currencies Status," CBDC Tracker, accessed April 17, 2024, https://cbdctracker.org/.
8. Warwick Powell, China, Trust and Digital Supply Chains: Dynamics of a Zero Trust World (London: Routledge, 2023).
9. Johannes Petry, "Same Same, but Different: Varieties of Capital Markets, Chinese State Capitalism and the Global Financial Order," Competition & Change 25, no. 5 (November 1, 2020): 605–30, https://doi.org/10.1177/1024529420964723.
10. "Shanghai Stock Exchange Signs MoU with Saudi Tadawul Group," Shanghai Stock Exchange, September 4, 2023, http://english.sse.com.cn/news/newsrelease/c/5726018.shtml.
11. "Saudi Tadawul Group and Chinese Shenzhen Stock Exchange Sign MoU to Boost Cooperation," Arab News, December 11, 2023, https://www.arabnews.com/node/2424046/business-economy.
12. John Benny, "Hong Kong Stock Market Seeks Pacts with Middle East Bourses amid IPO Boom," The National, October 26, 2023, https://www.thenationalnews.com/business/markets/2023/10/26/hong-kong-stock-market-seeks-pacts-with-middle-east-bourses-amid-ipo-boom/.
13. "China Is the World's Sole Manufacturing Superpower: A Line Sketch of the Rise," CEPR, January 17, 2024, https://cepr.org/voxeu/columns/china-worlds-sole-manufacturing-superpower-line-sketch-rise.
Please note: The above contents only represent the views of the author, and do not necessarily represent the views or positions of Taihe Institute.
This article is from the April issue of TI Observer (TIO), which focuses on the concept of "new quality productive forces" and tries to interpret its theoretical grounds and strategic importance. If you are interested in knowing more about the April issue, please click here:
http://www.taiheinstitute.org/UpLoadFile/files/2024/4/29/1720023057288b81-e.pdf
——————————————
ON TIMES WE FOCUS.
Should you have any questions, please contact us at public@taiheglobal.org
© 2013-2021 Taihe Institute (TI) . All rights reserved. Taihe Institute (TI) .京ICP备16023694号-1
Privacy Policy丨Terms of Service
Contact Us: public@taiheglobal.org
