How expanding China-led economic bloc Brics adds to the yuan’s global clout
- Developing economies Russia, Brazil, India and South Africa joined China in welcoming these six new member states into the group’s fold
- Brics members are expected to step up their use of local currencies for trade and development, shunning the globally dominant US dollar
Expanding a China-influenced group of the world’s largest developing economies is expected to give the yuan a stronger role in global trade, and member states are already discussing how to use their own currencies in trade, rather than the dominant US dollar.
Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates, will join existing heavyweights in a group that aims to promote trade and development without an overreliance on developed nations.
Brics finance ministers and central bank governors will report back at the next summit on the potential use of local currencies for trade among member states. The yuan is expected to dominate their discussions because of China’s influence in international trade.
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“[China] would be centre stage, because it’s got the biggest economy and does the biggest amount of trade,” said Robert Carnell, the Asia-Pacific regional head of research with ING in Singapore.
China did about US$450 billion in trade with the other four Brics nations last year, with US$190 billion of that involving Russia and US$166 billion with Brazil, professional services firm Dezan Shira & Associates said in an online briefing this week.
Moscow is also expected to buy around US$200 million worth of yuan each month, Bloomberg Economics reported in May.
South Africa counts China as its largest trading partner, and China-India trade reached a record-high US$136 billion last year.
South African President Cyril Ramaphosa said on Thursday that Brics members had taken note of global growth in the use of local currencies along with alternative settlement methods for cross-border trade.
Brics countries, he said, are “ready to explore opportunities for improving the stability, reliability, and fairness of the global financial architecture”.
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China has been expanding use of its currency for about 15 years, in what economists have described as a pushback against the legal tender of its geopolitical rival, the United States.
But legal and structural barriers to currency conversion, plus skittishness about the Chinese economy, have cramped the yuan’s uptake offshore.
However, it is already used for payments between China and five countries that will be in Brics from next year, said Chen Zhiwu, chair professor of finance at the University of Hong Kong, pointing to Argentina, Brazil, Iran, Russia and Saudi Arabia.
“All of these bilateral trade relations are going up,” Chen said.
Brics members such as Russia and Iran could use the yuan to help bypass US sanctions. Such yuan settlements among third-party countries have already been seen, like when Bangladesh and Russia agreed to use the yuan to settle payment for a nuclear plant Moscow is building in the South Asian country.
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“This move by Brics obviously weakens the power and geopolitical influence of the US,” said Bulelani Jili, an African studies Ph.D. candidate at Harvard University.
“Transactions involving the dollar involve the US government, which uses [the dollar] to police the behaviour of other countries,” Jili said. “Namely, this power gives the US the means to impose sanctions, precisely an alternative to military force.
“On the other hand, the pre-eminence of the dollar also means that the rest of the world is beholden and vulnerable to the changes in US fiscal and monetary policy, for good and bad.”
Argentina said in April that it would pay for imports from China in yuan instead of US dollars, which it is in low supply of. Since 2018, the middle-income South American country has faced rapid devaluation of its own currency due to inflation and domestic economic pressures.
Last year, the yuan overtook the euro as the second-most-dominant currency in Brazil.
As long as enough people can believe in a certain payment system, then the system becomes more of a reality
Admitting oil-rich Saudi Arabia, the United Arab Emirates and Iran to Brics advances the prospective use of local currencies, said Gustavo de Carvalho, a senior researcher with the South African Institute of International Affairs.
The US dollar will probably continue to hold sway among the Brics nations, economists say. US-dollar trading platforms are relatively accessible, and they come with “narrow” spreads, Carnell said. Spreads refer to differences between a transaction’s bid price and asking price.
India might pursue more Brics trade in rupees but is less likely to use the yuan, said Sameer Lalwani, senior South Asia expert with the US Institute of Peace’s Asia Centre. India and China still have thorny territorial disputes and long-term strategic issues with each other.
“I’m sceptical that India will try to expand trade in yuan payments going forward, because it continues to worry about Chinese coercive leverage and does not wish to bolster China’s currency influence,” Lalwani said.
Brazil, Russia and China are “the most serious” about de-dollarisation, said Chen at the University of Hong Kong. “As long as enough people can believe in a certain payment system, then the system becomes more of a reality,” he said.
