De-globalisation. De-dollarisation. Decoupling. De-risking. What on earth is going on in the world of finance? And is there an explanation that connects these four ‘Ds’?
The recent BRICS summit in Johannesburg touched on all four of these ‘D’s, explicitly or implicitly. And the decisions made at the summit – directly or indirectly – all have profound implications for the future of geoeconomics.
Much of the breathless analysis markets heard in August regarding the BRICS and its expansion from 5 to 11 countries revolved around the implications for the US dollar. For example, the much-publicised rumour that the new group might even set up its own currency – apparently as part of a concerted campaign promoting de-dollarisation – was rightly subjected to a barrage of criticism, albeit mostly from commentators defending the US dollar-centred status quo.
Predictably – presumably because the underlying subject matter is driven much more by hard data than the increasingly wishful thinking of the Western narrative – the geoeconomic angle tells a far more nuanced story.
The first involves the flow of capital, and here the US dollar dominates as evidenced by the US's 60%+ share of the MSCI All Country World Index for equities. (Most of the readers of this opinion likely ‘breathe this atmosphere’, as does the South African commentariat.)
The second atmosphere covers the flow of trade, and here the US dollar is visibly giving ground to a range of other currencies led by the Chinese renminbi but with the likes of the Indian rupee and even the UAE dirham playing supporting roles.
These two atmospheres connect via the two halves of the external account of a nation: its current account – where trade flows dominate – and its capital account – where bond, investment and equity flows dominate. If exchange controls did not exist, the surpluses and deficits arising from flows of these trade Yins and financial Yangs would be ‘corrected’ in movements in exchange rates.
The economic rise of China since 2000 is complicating the familiar order. In 2023, China will likely run an overall current account surplus of around US$340 billion, most of which will come from the ongoing bilateral trade surplus it runs with the US. Add to this backdrop the fact that China has exchange controls that preclude the ‘normal’ clearing of forex markets: Without those capital controls, theoretically there ‘should’ be an appreciation in the value of the Chinese renminbi. One fallout of this structural current account surplus run by China is that it has built up foreign exchange reserves of over US$3 trillion. (By comparison, the US – save for the gold it keeps at Fort Knox – holds no foreign exchange reserves.) In other words, by controlling capital flows, China is exerting a rising degree of control over that atmosphere in which it has the greatest influence: trade.
By contrast, the US, supported by the reserve currency status of the US dollar, has a dominant position in the atmosphere of capital. Historically, the surplus the US has run on its capital account has gone a long way towards funding the deficit it runs on its current account. (And it is a huge current account deficit: in 2022, it accounted for over 60% of all current account deficits run worldwide.)
Of course, currency is nothing more than money and, in economics, money has four functions: as a means of exchange, as a unit of account, as a store of value and as a standard of deferred payment. Internationally, the US dollar has dominated all four functions since World War II. This dominance is now fraying, albeit much more in the atmosphere of trade flows – so where money is primarily used as a means of exchange – and hardly at all in the atmosphere of capital flows – which broadly covers the other three functions.
At the risk of oversimplification, the US is moving towards de-globalising its place in the world of trade. This it is doing by increasing tariffs and quotas, particularly on imports from – and even selectively, exports to – China.
For its part, as the US tries to de-globalise its trade patterns – albeit patterns that involve direct trade with China – China is moving towards undermining the hegemony of the US dollar as a means of exchange in the world of trade. This it is doing by expanding its trade footprint, particularly with countries outside the Western core. A rising proportion of that trade – especially where commodities are involved, even oil – is now being denominated in renminbi. The net result is that the world of trade is not so much de-globalising as ‘re-Orient-ating’, pun intended.
Neither the US nor China is, as yet, fully succeeding in their respective aims, but cracks are already very evident in the regime that has governed the world of trade and finance since 1945. These changes are happening gradually, amounting to an ongoing process not an overnight event.
In addition, with regard to the atmosphere of capital (and again with only patchy progress thus far), the US is trying to limit access by Chinese companies and institutions from that atmosphere where the US is for now dominant. For instance, the US is discouraging the listing of Chinese companies in New York whilst at the same time making investing in China more complicated for US companies and institutions.
For its part, to the limited extent that a vacuum in the atmosphere of capital might be appearing, China is intent on filling it by very gradually increasing the role played by the renminbi in the world of capital. This is especially evident in capital flows from nations outside the Western core into China. To encourage capital inflows, China is making such foreign direct investment easier as well as making foreigners wishing to invest in the Chinese bond and equity markets feel more welcome.
These changes are not well appreciated in the West as both US and non-US Western capital markets essentially breathe via the US dollar, albeit for some through a domestic currency filter. A telling example of this is that the most widely cited index of the US dollar’s value is the DXY. The latter is made up of a basket of six Western currencies: the euro, the Japanese yen, the British pound, the Swiss franc, the Swedish kronor and the Canadian dollar. Collectively, these six currencies, together with the US dollar, largely define the global atmosphere of capital as championed by the likes of Bloomberg and CNBC. The currencies of the US’s second and third largest trade partners respectively – the Mexican peso and the Chinese renminbi – are excluded from the DXY basket. Only the currency of the US’s largest trade partner and the economy that is most integrated with the US is included: the Canadian dollar.
But the atmosphere of world trade is expanding fast and much of it beyond the regular purview of Western capital market commentators. Bilateral trade that cuts out US dollar invoicing is now happening more regularly, with the BRICS 11 pioneering this trend. A recent chart highlights the growth of renminbi-denominated trade in Africa.
Figure 1: Percentage of African total CNY cross-border payments, 2022
Source: SWIFT, Standard Chartered Research.
If history is any guide, once nations are comfortable with using a currency other than the US dollar as a means of exchange, they will broaden their non-dollar activities to include the other three functions of money as well. But expect the atmosphere of trade to exhibit de-dollarisation long before that of capital.
De-globalisation. De-dollarisation. Decoupling. De-risking. Is there an explanation that connects these four ‘Ds’? Yes. The centre of economic gravity in the world is shifting to the East, back to where it came from 200 years ago.
For the past 2 centuries, the rest of the world has been oriented towards the West. Firstly, this was mostly because of the colonial order being centred on Europe and, more recently, as a result of the economic order – with the reserve currency status of the dollar playing an integral part – being centred on the United States.
But as relative economic fortunes have shifted in the past 30 years – evidenced by the shifting of the origin of many supply chains to Asia and, since 2000, especially to China – the longstanding geoeconomic order is being uprooted. Relatively speaking, the East has risen and will continue to rise at the expense of the West.
And the West is not too happy about it. With the US – understandably as it is the reigning economic hegemon – especially concerned about the implications, the US-led Western order has belatedly started to take ‘precautions’. De-globalisation, decoupling and de-risking are all about reducing Western dependencies particularly on China, mostly by diversifying supply chains away from China. This is happening even if the much-desired result of ‘onshoring’ is not nearly as common as ‘friendshoring’. For the US, this has meant replacing China as a supplier with the likes of Mexico, Vietnam and other South East and South Asian countries. (That China Inc. now owns many of the suppliers in these locations does not seem to matter to the West!)
One other aspect of decoupling is the protection of those few areas of intellectual property where the West still has an edge: chipmaking being the most high-profile example.
De-dollarisation is in many respects the flipside of the other three ‘Ds’: As the West pushes back against the growing dominance of the East in the atmosphere for trade, the Rest – led by the East – are starting to push back against the hegemony of the West in the wider world of money. And there is no more visible dimension of that hegemony than the primacy of what is – for now – the world’s reserve currency: the US dollar.
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