WENHUA

ZONGHENG
A Journal of Contemporary Chinese Thought

May 2024 | Vol. 2, No. 1

The BRICS and De-Dollarisation:
Opportunities and Challenges
Editorial Board Translators
Tings Chak Nan Hua
Jojo Hu Kelly Echiburú
Jeff Xiong Tica Moreno
Vijay Prashad
Ajit Singh Designers
Tings Chak
Managing Editors Christine Cao
Ajit Singh
Grace Cao Web
Amilcar Guerra
Coordinators Yingnan Wu
Ajit Singh (English)
Ines Chen (Español)
Tica Moreno (Português) A collaboration between:

Editors
Ajit Singh (English)
Tings Chak (English)
Jeff Xiong (English)
Gisela Cernadas (Español)
Leandro Casarete (Español)
Marco Fernandes (Português)
Luiz Felipe Albuquerque
(Português)

Cover art created by Tricontinental: Institute for Social Research.

WENHUA ZONGHENG TABLE OF CONTENTS

Paulo Nogueira Batista Jr.

04 The BRICS and the Challenge of De-Dollarisation

Gao Bai

10
From De-Risking to De-Dollarisation:
The BRICS Currency and the Future of the
International Financial Order

Ding Yifan

35 What Is Driving the BRICS’ Debate

on De-Dollarisation?

Yu Yongding

45 China’s Foreign Exchange Reserves:

Past and Present Security Challenges
4 WENHUA ZONGHENG

The BRICS and the Challenge

of De-Dollarisation

The papers brought together in the

present issue of Wenhua Zongheng
(文化纵横) seek to throw light upon
topics of major interest for the inter-
national economy. In particular, the
issue takes up the popular and widely
discussed matter of de-dollarisation.
Is it needed? Is it possible in practice
and, if so, in what time-frame? How
can or should countries interested in
de-dollarisation proceed? Can the
BRICS jointly or individually help
move this forward? Could China step
in to provide its currency, the renmin-
bi, as an alternative to the US dollar?

All or most of these questions are dis-

cussed in the papers written by pro-
fessors Gao Bai (高柏), Yu Yongding
(余永定), and Ding Yifan (丁一凡).
Paulo Nogueira Batista Jr. I have also tried my hand at writing
is a Brazilian economist, for-
mer vice president of the New about de-dollarisation three times in
Development Bank (2015– the recent past.1 In this prefatory note,
2017), and former executive
director for Brazil and other
countries in the International ¹ See Paulo Nogueira Batista Jr., The BRICS and the Fi-
Monetary Fund (2007–2015). nancing Mechanisms They Created: Progress and Shortcom-
ings (London: Anthem Press, 2022); Paulo Nogueira Ba-
E-mail: tista Jr., ‘A BRICS Currency?’ (paper, BRICS Seminar on
[email protected] Governance & Cultural Exchange Forum 2023, Johan-
nesburg, South Africa, 19 August 2023), https://www.
nogueirabatista.com.br/wp-content/uploads/2023/09/
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 5

I will come back to some aspects of the ongoing debate, trying not to repeat
myself too much and addressing at the same time issues raised in the three
papers by the Chinese scholars.

As is well-known, de-dollarisation has become a hot topic since 2022, when

the United States and Europeans decided to block a large part of Russia’s
international reserves in response to the invasion of Ukraine, as described
by Yu Yongding. Western officials and experts have traditionally lectured
developing countries about the need to adopt ‘confidence-building’ policies
and to respect property rights. In retrospect, this is truly amazing. The freez-
ing of Russian assets and the more recent threats to move towards outright
confiscation are major ‘confidence-destroying’ steps, doing great harm to
the US dollar and the Euro. These actions set off an alarm for countries
like China, a major holder of US dollar bonds as part of its international
reserves. Any country experiencing conflicts with the US and the rest of the
West immediately realised that steps were needed to reduce their reliance
on the US dollar and the Western financial system. Efforts were intensified
in many parts of the world to use national currencies in international trans-
actions, to build or reinforce alternative payments systems, to rely more on
the Chinese renminbi, and even to create a new BRICS reference currency.
Undeniably, what we have seen is a major self-inflicted blow by the US and
Europe. The three Chinese professors have made in their papers significant
contributions to the discussion of all these challenges.

The popularity of the topic of de-dollarisation in wider circles and in the

media is not usually accompanied by an understanding of its complexity.
There is a widespread expectation that the BRICS will develop, in the near
future, an alternative to the US dollar. But is this expectation realistic? Per-
haps not.

The complexity of the topic is two-fold – political and technical. On the

political side, one could mention two major difficulties: (a) the notorious

Aug-2023-On-possible-BRICS-currency.pdf; Paulo Nogueira Batista Jr., ‘BRICS Financial and Monetary Initia-
tives – The New Development Bank, the Contingent Reserve Arrangement, and a Possible New Currency’ (paper,
20th Annual Meeting of the Valdai Discussion Club, Sochi, Russia, 2 October 2023), https://valdaiclub.com/a/
highlights/brics-financial-and-monetary-initiatives/; Paulo Nogueira Batista Jr., ‘BRICS Financial Settlements’
(presentation, discussion in remote format organised by the Valdai Discussion Club, 18 March 2024), https://
www.nogueirabatista.com.br/wp-content/uploads/2024/03/Mar-2024-BRICS-Financial-Settlements.pdf.
6 WENHUA ZONGHENG

resistance of the US to giving up what the French in the 1960s called the
‘exorbitant privilege’ of having its national currency – issued and managed
according to US national interests – serve as the foremost global currency;
and (b) the difficulty of actually bringing the BRICS countries together
in this endeavor. Allow me to try to address these two major difficulties,
based in part on my practical experience as an International Monetary Fund
(IMF) director, Brazilian delegate in the BRICS process, and later vice-
president of the New Development Bank (NDB).

One should never lose sight of the fact that the United States will in all like-
lihood use all the many instruments at its disposal to struggle against any at-
tempt to dethrone the dollar from its status as linchpin of the international
monetary system. They have always done so, beginning from the monetary
and financial negotiations that took place at the end of and immediately
after the Second World War. Keynes’ ideas for an international currency
were adamantly rejected by US officials. Later, the US blocked, using its
veto power in the IMF, steps that could have led to the institution’s Special
Drawing Rights (SDR) becoming a full currency of international status. To
this day, the SDR remains a sideshow, of almost no relevance outside the
IMF. The US views the incipient discussions on de-dollarisation among the
BRICS countries with deep distrust and is likely to interfere at every turn
to block initiatives and generate dissension among the BRICS. One can ask,
for instance, whether India and South Africa will be immune to pressures
coming from the US on this matter? My own country, Brazil, is currently
following an independent foreign policy under President Lula da Silva, but
a future government of a different orientation might well be reluctant to
displease the US on such a critical issue.

This brings us directly to the second dimension mentioned above. Are the
BRICS sufficiently cohesive as a grouping to tackle this complex challenge?
Drawing on my practical experience of the BRICS process, I would cau-
tion against being overly optimistic in answering this question. Even when
there were only five countries around the table, the difficulty of reaching an
agreement on concrete steps, notably in the creation and implementation of
the monetary fund of the BRICS (the Contingent Reserve Arrangement,
CRA) and of the development bank (the NDB), were truly mind-boggling.
First, because of the differences in outlook and national interests between
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 7

the five countries. Second, sadly, because of the lack of talent and technical
competence of many of the officials representing the five countries in these
negotiations and in the resulting financial mechanisms.2 This is a harsh
statement, I fully realise, but if we are serious about tackling the daunting
issues of de-dollarisation and alternatives to the US currency, we need to be
realistic and to have a minimum level of self-criticism.

Now, the BRICS expansion, initiated in 2024, will make coordination

problems and political vulnerabilities even worse. With nine or ten member
countries (depending on whether Saudi Arabia accepts the invitation to
join), one can predict that there will be an even greater challenge to move
forward on any practical matter. Non-experts, outside observers, and even
well-prepared academics are often unaware of these difficulties. Some of
them add up the gross domestic products (GDPs) and populations of the
BRICS or BRICS+ and conclude hastily that the group has become a great
force in the world. Some countries, I believe that China and Russia are
among them, want to expand the group even further. In journalistic rhetoric,
the expanded BRICS is supposedly set to become a forum for the Global
South. This may sound fine, but one could ask: will a large and quick in-
crease in the number of members of the group not ultimately result in the
BRICS+ becoming something like a ‘UN of the South’, perhaps as ineffec-
tive as the UN itself?

However, let us not be too negative. The fact remains that the BRICS group-
ing includes major countries. The four original members – Brazil, Russia, In-
dia, and China – are among the giants of the world. China is now the largest
economy, in terms of GDP at purchasing power parity, having overtaken the
US by a considerable margin. The BRICS countries share a longstanding
dissatisfaction with the existing international monetary and financial archi-
tecture. Reasons for dissatisfaction have only increased in these initial dec-
ades of the 21st century. Financial, economic, and political instabilities have
risen dramatically, but the West gives no sign of making the adaptations and
concessions needed to accommodate the BRICS and other emerging mar-

² In my book, The BRICS and the Financing Mechanisms They Created: Progress and Shortcomings (2022), I dis-
cussed in some detail the negotiations and the first five years of existence of the NDB and the CRA. I came back
to the matter in a short paper published in 2023, see Nogueira Batista, ‘BRICS Financial and Monetary Initiatives’,
https://valdaiclub.com/a/highlights/brics-financial-and-monetary-initiatives/.   
8 WENHUA ZONGHENG

ket nations. The dysfunctionality of the dollar-based international monetary

system, which dates back to the 1960s, is becoming increasingly obvious.

Thus, we have the duty to try to rise to these challenges. If we cannot do so

as a group, perhaps China will take it upon itself to foster de-dollarisation.
However, as stressed by Gao Bai, it is not at all clear whether China has
the means to and is truly interested in replacing the US dollar with its own
currency. For an economy as yet not fully mature in financial terms and in
other aspects, the ‘exorbitant privilege’ may well become an ‘exorbitant bur-
den’. Professor Gao has asked the relevant questions. Would China be ready
to and interested in making the renminbi a fully convertible currency? This
is probably a requirement for it to replace the US dollar to any significant
extent. Would China be ready to accept the appreciation resulting from the
increase in international demand for its currency? What effects would ap-
preciation of the renminbi have on China’s export competitiveness and bal-
ance of payments on current account? Would a large increase in the role of
China’s currency not conflict with the country’s longstanding and successful
strategy of cautiously protecting its economy and financial systems from
international turbulence? And, last but not least, is China prepared to bear
the brunt of the US wrath against anyone that seriously strives to displace
the dollar? Because of these and other uncertainties, it is rather difficult to
expect China alone to lead the de-dollarisation process.

This brings us back to the BRICS. Assuming that the group will be ca-
pable of surmounting coordination problems, political vulnerabilities, and
the scarcity of specialised personnel, the effort could be spread among the
several member countries. The considerable political and technical burden
would then be shared by a number of countries.

Russia, as chair of the BRICS in 2024, has already started working on a re-
view of the international system and possible BRICS initiatives in this area.
Little is known about how far the BRICS have managed to move under
Russian leadership this year. In any case, it can be expected that Russia, be-
ing the main victim so far of the weaponisation of the US dollar and of the
Western financial system, will do its utmost to move the agenda forward.
Brazil, the next chair of the group, in 2025, will pick up, I hope, where Rus-
sia has left off.
THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 9
10 WENHUA ZONGHENG

From De-Risking to
De-Dollarisation: The BRICS
Currency and the Future of the
International Financial Order
‘From De-Risking to De-Dollarisation:
The BRICS Currency and the Future of
the International Financial Order’ (从
去风险到去美元化: 金砖货币与国际
金融秩序的未来) was originally pub-
lished in Wenhua Zongheng (文化纵
横), issue no. 5 (October 2023).

‘De-risking’ is replacing ‘decoupling’

as the key word to describe today’s
international political and economic
hotspots. Western countries are em-
phasising de-risking trade and invest-
ment with China at the level of supply
Gao Bai (高柏) is a professor chains, while non-Western countries
of sociology at Duke University. are de-risking their economic ties with
His main research fields include
economic sociology, comparative
the West in response to Western-led
historical sociology, international economic sanctions against Russia, en-
political economy, and organi- acted after the outbreak of the Russia-
sational theory. His published Ukraine war. The refusal of developing
works include Economic Ideology
and Japanese Industrial Policy: De- countries to align with Western policy
velopmentalism from 1931 to 1965 on the war and sanctions against Rus-
(1997) and Japan’s Economic Di- sia has led to increasing discourse on
lemma: The Institutional Origins of
Prosperity and Stagnation (2001). the Global South’s political role on the
international stage. The Global South’s
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 11

rising economic and political influence was highlighted at the 2023 BRICS
summit in South Africa, where Argentina, Egypt, Ethiopia, Iran, Saudi Ara-
bia, and the United Arab Emirates (UAE) were invited to join the organisa-
tion, amid dozens of applicants. The BRICS grouping appears set to become
a significant international political and economic platform representing the
interests of the Global South, a development that will profoundly reshape the
international order.

Western economic sanctions against Russia have significantly impacted the

developing economies of the Global South in three main respects. First, West-
ern energy sanctions and decoupling from Russia have disrupted the relatively
stable, long-standing supply-demand relationships in the international energy
market. When Russian-European energy cooperation ceased, the Russian en-
ergy industry was forced to turn to the Asia-Pacific market, exporting oil and
gas at low prices. Russia’s strategic response has, in turn, placed a lot of pres-
sure on other energy producers, driving fierce competition in the Asia-Pacific
market. This competition is altering the geopolitical landscape and the inter-
national political and economic balance of power. Second, Western economic
sanctions against Russia have led to restructuring of the global supply chain.
The withdrawal of Western companies and suppliers from the Russian market
has forced Russia to find new sources of numerous goods and components,
providing important commercial opportunities for non-Western firms to enter
the Russian market. Third, Western financial sanctions have frozen Russia’s
foreign exchange reserves and confiscated the assets of some wealthy Russian
citizens. These measures have triggered concerns in many countries about the
risk of holding dollar-denominated assets, prompting them to transfer these
assets away from developed countries and to actively seek alternatives to the
US dollar, thus becoming a key driver of the current de-dollarisation trend.

This paper examines three aspects of the de-risking efforts of the Global South
and explores their impact on the future development of the international eco-
nomic order. First, the de-risking efforts of the Global South are epitomised by
de-dollarisation. Countries of the Global South are attempting to reduce their
use of the dollar in international trade by strengthening monetary sovereignty
and national economic security. This movement is separating the international
trading system from the international financial system, which since the end of
the Second World War, has been tightly linked by the key currency, the US
12 WENHUA ZONGHENG

dollar. In the past, the US dollar, as the reserve currency of countries in the
international financial system, was used not only for commodities’ pricing but
also for cross-border trade settlements and inter-bank lending, greatly enhanc-
ing the efficiency and convenience of settlements in the multilateral trading
system governed by the General Agreement on Tariffs and Trade (GATT) and
the World Trade Organisation (WTO). However, the West’s weaponisation of
the US dollar has prompted Global South countries to pursue local currency
settlements, a dynamic that will likely upend the dollar-dominated system of
international trade settlements and payments, weaken or even end the dollar’s
status as the key global currency, and reshape the international financial order.

Second, although many in the de-dollarisation debate advocate for replacing

the US dollar with the Chinese renminbi (RMB) as the new key global cur-
rency, this is unlikely to happen in the short term. Most supporters of RMB
settlements are large energy exporters with large trade surpluses with China.
Although the internationalisation of the RMB is set to take off in the future,
unless the weaponisation of the US dollar intensifies or the credibility of the
US dollar is destroyed by a severe debt crisis in the US, it is unlikely that the
RMB will replace the US dollar in the short term due to various objective con-
ditions. In the present period, it is more likely that the dollar’s global status will
be weakened by the various de-risking efforts of the Global South countries
and that the international financial system will transition from the dominance
of the US dollar to the coexistence of several major currencies, including the
US dollar, RMB, euro, and the BRICS currency.

Third, in a situation where several major currencies coexist, the greatest com-
mon denominator for joint action among the Global South countries is es-
tablishing a reference value for settlements in their local currencies and an
exchange platform to support such settlements. The great demand for such
a valuation reference provides an opportunity for the creation of a BRICS
currency. Most Global South countries do not wish to choose sides in global
political-economic matters but seek a multipolar world and the creation of
international platforms that are more equal and fair, and that better represent
their interests so that they can hedge against the risks posed by the current in-
ternational economic order. In advocating for de-dollarisation, these countries
aim to mitigate the various risks posed by the US dollar, not to confront it.
Therefore, the traditional perspective – i.e., the international financial system
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 13

must have one dominant currency and, since the dollar is no longer viable, it
should be replaced by the RMB – may be inadequate in grasping the crux of
the global situation, as the world faces ‘great changes unseen in a century’ (百
年未有之大变局, bǎinián wèi yǒu zhī dà biànjú).

The Russia-Ukraine war is profoundly changing the international order: on

the one hand, Western countries are trying to break away from the unified
international economic order led by the United States in the post-Cold War
period and return to the landscape of the coexistence of the two confronta-
tional systems during the Cold War period; on the other hand, the Global
South countries, through de-risking, have begun to put building a multipolar
world into action, which was just lip-service in the past. Whether it is the de-
risking of China and Russia by the West or the de-risking of the West by the
Global South countries, the common feature is the weakening of the exist-
ing Western-dominated international economic order and the promotion of a
more multipolar world.

The Impact of Western Sanctions against Russia

This section analyses the relationship between de-risking, de-dollarisation, and

the BRICS currency and the impact that Western economic sanctions against
Russia have had on this dynamic in the Global South.

(i) International Energy Markets

After the outbreak of the Russia-Ukraine war, both Europe and the United
States banned imports of crude oil, refined petroleum products, and coal from
Russia, leading to a sharp decline in Russian energy exports to Europe. Rus-
sian gas exports plummeted 25.1 percent in 2022 due to European countries’
halting their purchases of Russian gas and the sabotage of the Nord Stream
pipeline. Europe’s energy decoupling has forced Russia to accelerate its efforts
in Asia-Pacific markets. In 2022, China’s imports of Russian pipeline gas and
liquefied natural gas (LNG) soared 2.6 times and 2.4 times to $3.98 billion
and $6.75 billion, respectively.1

¹ Erin Hale, ‘How China and India’s Appetite for Oil and Gas Kept Russia Afloat’, Al Jazeera, 24 February 2023,
https://www.aljazeera.com/2023/2/24/how-china-and-indias-appetite-for-oil-and-gas-kept-russia-afloat.   
14 WENHUA ZONGHENG

Similar trends have taken place in the oil sector. Prior to the war, in 2021, 8
percent of US oil imports came from Russia; after the outbreak of war, the US
banned imports of Russian energy.2 In December 2022, the European Union
(EU), Group of Seven (G7) countries, and Australia imposed an embargo on
Russian oil and a price cap on Russian exports. This forced Russia to reduce
the price of its oil significantly and shift its export focus to the Asia-Pacific
region. India, China, and Turkey, all major energy consumers, have signifi-
cantly increased their imports of Russian crude oil.3 In 2022, China’s imports
of Russian crude oil increased by 8 percent, making Russia the second largest
supplier of crude oil to China.4 India’s imports of Russian oil saw the larg-
est increase, increasing by more than 9 percent in the months following the
imposition of the Western embargo in December 2022. In addition, in 2022,
China’s coal imports from Russia surged 20 percent to 68.06 million tonnes,
while India’s imports of thermal coal from Russia grew by nearly 15 percent to
161.18 million tonnes.5

(ii) Supply Chain Restructuring

Many US-origin technologies have been restricted from being exported to
Russia and Belarus. US exporters must apply for licences to export a range
of technologies to Russia, including computers, communications equipment,
sensors, lasers, navigation, and aerospace and propulsion technology. The sanc-
tions against Russia also restrict the export of products from other countries
that use such US technologies.6 Since February 2022, European exports to
Russia affected by the sanctions have amounted to 43.9 billion euros, including
products related to quantum computers, advanced semiconductors, electronic
components and software, machinery and transport equipment, energy indus-
try equipment, technology, and services, aviation and space industry goods and

² Rebecca M. Nelson, Christopher A. Casey, and Andres B. Schwarzenberg, ‘Russia’s War on Ukraine: Finan-
cial and Trade Sanctions’, Congressional Research Service, 22 February 2023, https://crsreports.congress.gov/
product/pdf/IF/IF12062/4.
³ ‘俄罗斯: 2022年天然气出口暴跌, 石油出口却增加’ [Russia: Gas Exports Plummet in 2022, Oil Exports
Rise], investgo.cn, 15 February 2023, https://www.investgo.cn/article/gb/tjsj/202302/654653.html.   
⁴ Hale, ‘How China and India’s Appetite for Oil and Gas Kept Russia Afloat’.   
⁵ Hale, ‘How China and India’s Appetite for Oil and Gas Kept Russia Afloat’.   
⁶ Nelson, Casey, and Schwarwzenberg, ‘Russia’s War on Ukraine: Financial and Trade Sanctions’.   
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 15

technologies, maritime navigation and radio communication technology, dual-

use goods, luxury goods, and more.7

The massive withdrawal of US, European, Japanese, and South Korean compa-
nies from Russia has created opportunities for companies from other countries
to enter the Russian market. For example, Samsung and Apple’s joint share
of the Russian mobile phone market, which was as high as 53 percent at the
end of 2021, fell to only 3 percent by the end of 2022. Meanwhile, the share
of Chinese mobile phones in the Russian market rose from 40 percent at the
end of 2021 to 95 percent at the end of 2022.8 A similar trend was observed
in the Russian auto market. Between 2021 and 2022, Germany’s BMW and
Mercedes-Benz disappeared from the Russian market, while China’s Chery,
Great Wall Motor, and Geely rose to the top ten best-selling passenger car
brands. Despite the sharp overall contraction of the Russian auto market due
to economic sanctions, sales of Chinese-made cars in Russia grew by 7 percent
in 2022.9

(iii) Financial Risk Avoidance

After the outbreak of the war, the West expelled Russia from the SWIFT
international banking communications system, and European and American
banks froze as much as 300 billion euros of the Russian central bank’s for-
eign exchange reserves and 21.5 billion euros of assets belonging to sanctioned
Russian individuals.10 In the past, the US dollar was trusted globally as a ‘safe
haven currency’, but this trust has been broken by the Western financial sanc-
tions against Russia, which have de facto constituted a ‘selective default’.11
Many developing countries, including traditional US allies such as Saudi Ara-
bia, have begun to fear that, should they ever find themselves on the opposite
side of the US in a geopolitical dispute, their dollar-denominated assets will

⁷ ‘EU Sanctions against Russia Explained’, The Council of the European Union and the European Council, ac-
cessed 25 February 2024, https://www.consilium.europa.eu/en/policies/sanctions/restrictive-measures-against-
russia-over-ukraine/sanctions-against-russia-explained/.   
⁸ Michelle Toh, ‘Chinese Brands Have Replaced iPhones and Hyundai in Russia’s War Economy’, CNN, 26
February 2023, https://www.cnn.com/2023/02/25/business/russia-chinese-brands-sales-surge-ukraine-war-
intl-hnk/index.html.   
⁹ Toh, ‘Chinese Brands’.   
¹⁰ ‘EU Sanctions against Russia Explained’.   
¹¹ James Rickards, ‘Western Countries about to Slam into A BRICS Wall?’, interview by Stephanie Pomboy,
Wealthion, YouTube, 8 August 2023, https://www.youtube.com/watch?v=88pP53lcBwQ.   
16 WENHUA ZONGHENG

not be safe. Countries like India have also argued that sanctions against Russia
have led to volatility in food and energy prices, harming the world’s poor. As
the US-China relationship has become increasingly tense, concerns have also
grown regarding the potential crises that US sanctions against China could
trigger in the future. Although the US dollar is the world’s most popular trade
settlement currency, China is the world’s largest trading nation, and in the face
of this international political and economic uncertainty, some countries have
argued that it would be better to reduce the use of the US dollar in global trade
rather than reduce trade with China.12

The case of Switzerland illustrates how the behaviour undertaken by other

countries to avoid the financial risks posed by sanctions against Russia can
harm the West’s financial sector. Before the war, roughly 80 percent of Rus-
sian commodities were traded through Switzerland, amounting to $11 billion,
while 30 percent of private Russian assets held abroad were located in Swit-
zerland. Since the war broke out, Switzerland has abandoned its neutrality
and participated in the EU’s financial sanctions against Russia. Credit Sui-
sse alone froze $19 billion worth of Russian assets, more than a third of all
Russian assets in Switzerland, while the Swiss government froze more than
$8 billion worth of Russian and Belarusian assets. Swiss authorities also re-
quired local banks to report deposits of over 100,000 Swiss francs belong-
ing to Russian individuals and prohibited them from accepting new deposits
exceeding this amount from Russian individuals. By November 2022, 7,500
people were on the list, involving CHF 46.1 billion in deposits.13 Due to these
sanctions, wealthy individuals worldwide began to move their funds out of
Switzerland. For instance, Credit Suisse experienced severe client divestment,
reaching $119 billion in the final quarter of 2022 alone. The divestment crisis
was compounded by the subsequent collapse of several US banks and the re-
fusal of Credit Suisse’s largest shareholder, Saudi National Bank, to increase
its capital input. As a result, Credit Suisse faced insolvency and was ultimately
acquired by UBS at the behest of the Swiss government. Leading Swiss banker
Josef Ackermann noted that the Swiss government had put the rule of law
and property rights at risk when it made individuals pay for the actions of the

¹² Gideon Rachman, ‘How the Ukraine War Has Divided the World’, Financial Times, 17 April 2023, https://
www.ft.com/content/40c31fda-1162-4c40-b3d5-b32e4ac5d210.   
¹³ ‘A Third of Russian Assets in Switzerland at Credit Suisse’, finews.com, 13 February 2023, https://www.finews.
com/news/english-news/55768-russian-funds-one-third-is-at-credit-suiss.   
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 17

Russian government. Citizens of other countries would assume that the Swiss
government would do the same in the future to make them pay for the wrongs
done by their homeland governments. Confiscating the assets of Russian indi-
viduals has been devastating for the Swiss financial industry.14

Financial Sanctions and Barter Trade

The impact that Western economic sanctions against Russia have had on the
Global South is intertwined across three areas: energy markets, supply chains,
and international finance. Accordingly, the Global South’s de-risking behav-
iour is closely related to these three areas.

After the West banned Russia from the SWIFT system in March 2022, Rus-
sian energy exports could no longer be settled in dollars or euros. Russia coun-
tered by requiring hostile countries to purchase Russian energy in rubles. If
these countries did not have rubles, they had to open accounts in Russian
banks to deposit dollars and euros, which were then converted to rubles for
payment. Since European countries were unable to completely decouple from
Russian gas immediately for most of 2022, they had to convert their euros and
dollars into ruble payments. In this way, the ruble’s exchange rate was strongly
supported for a time. At one point, its value was even higher than it had been
before the war.

The weaponisation of the US dollar and Russia’s countermeasures have given

the Global South countries a new perspective on the relationship between the
international financial and trading systems. First, the dollar’s value as a curren-
cy for international trade settlements has become less important for countries
facing Western economic sanctions and experiencing major geopolitical crises
or wars because these countries cannot buy what they want even if they have
dollars. Second, in such extreme environments, a country can only trade with
others for critical resources if it has energy, resources, or industrial manufac-
turing capacity.15 Third, to reduce the risk of being unable to make purchases
in the face of sanctions or warfare, it is necessary to build strong cooperative

¹⁴ ‘A Third of Russian Assets in Switzerland at Credit Suisse’.   

¹⁵ Zoltan Pozsar, ‘War and Commodity Encumbrance’, Credit Suisse Economics, 27 December 2022.   
18 WENHUA ZONGHENG

relationships in peacetime with various economies that can provide important

goods. Finally, trade between major producers of energy, resources, and manu-
factured goods, if settled in their currencies, can enable them to significantly
reduce their dependence on the US dollar.

With Russia’s energy exports shifting to the Asia-Pacific and competition in-
tensifying among energy exporters for this regional market, major exporters of
energy and resources are expanding their cooperation with China for several
reasons. First, these principal energy and resource exporters also import vast
quantities of manufactured goods from and have trade surpluses with China.
To bundle strategic interests, these countries are more willing to settle trade in
RMB. For example, China has signed or intends to sign, agreements to settle
bilateral trade in RMB with major energy resource countries – such as Saudi
Arabia, Russia, Brazil, Iraq, Iran, and Argentina – all of which have tens of bil-
lions of dollars in trade surpluses with China and can use RMB to purchase
more manufactured goods and infrastructure directly from China. Second,
under extreme conditions, such bilateral trade can be bartered. As such, for
these energy-rich countries, cooperation with China, a manufacturing pow-
erhouse, can reduce the risk of being unable to obtain vital supplies should
they encounter a major international crisis. Third, through cooperation with
China, these countries can combine bilateral trade in energy resources with
their medium- and long-term economic development needs, obtaining from
China the investment, technology, and infrastructure necessary for industrial
development, particularly high-tech industries.

In December 2022, the Gulf Cooperation Council (GCC) and China held
their first joint summit in Saudi Arabia. The joint statement issued at the con-
clusion of the summit marked the beginning of a paradigm shift in strategic
cooperation between the Gulf states and major countries outside the region.
Since the Second World War, strategic cooperation between the Gulf states
and the United States has taken the form of an ‘oil-for-security’ exchange: the
Gulf states ensure the supply of oil to the US, which, in turn, provides secu-
rity for the states, including the sale of massive amounts of weapons; the Gulf
states use their oil revenues to purchase a large number of US treasury bonds
and invest in US dollar-denominated assets, thus creating a petrodollar sys-
tem.16 As the US began to increasingly exploit its offshore oil and gas reserves

¹⁶ Pozsar, ‘War and Commodity Encumbrance’.   

 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 19

as well as shale oil, it not only drastically reduced its dependence on energy
from the Middle East – thereby reducing the strategic value of the Gulf region
to the US – but also became a competitor to the Gulf states in the internation-
al energy market.17 Before the Russia-Ukraine War, the US and Gulf states
had already begun to drift apart. After the outbreak of the war, the decoupling
of Europe from Russian energy and Russia’s shift to the Asia-Pacific energy
market have greatly accelerated this trend. Unlike the oil-for-security coop-
eration between the Gulf states and the United States, cooperation between
the Gulf states and China is based on ‘all-round cooperation in the energy
sector’: China invests in the Gulf states’ downstream energy industries, while
the Gulf states use their expertise to cooperate with China in the development
of its upstream energy industries, including joint oil and gas exploration and
extraction in the South China Sea. A new ‘oil-for-development’ paradigm is
replacing the old ‘oil-for-weapons’ paradigm.18 This new paradigm is reflected
in the recent consensus in cooperation between China and countries such as
Saudi Arabia, Russia, and Brazil.19

The US-dominated international economic order is based on finance, empha-

sising the dominance of the US dollar as the world’s reserve currency. The new
international economic order that is being promoted by the Global South,
including China, is based on trade – exchanging energy and resources for
manufactured goods and infrastructure. This new international economic or-
der will be based less on currencies and more on commodities, which will lead

¹⁷ Gao Bai, ‘做连接亚洲与非洲的大陆桥: 沙特问题的中国解决方案’ [Being a Land Bridge Connecting Asia

and Africa: A Chinese Solution to the Saudi Problem], 西南交通大学学报(社会科学版) [ Journal of Southwest
Jiaotong University (Social Science)], no. 4 (2014).   
¹⁸ Pozsar, ‘War and Commodity Encumbrance’.   
¹⁹ See ‘中华人民共和国和沙特阿拉伯王国联合声明’ [ Joint Statement by the People’s Republic of China and
the Kingdom of Saudi Arabia], Ministry of Foreign Affairs of the People’s Republic of China, 9 December 2022,
https://www.mfa.gov.cn/wjdt_674879/gjldrhd_674881/202212/t20221209_10988250.shtml; ‘中华人民共和国
主席和俄罗斯联邦总统关于2030年前中俄经济合作重点方向发展规划的联合声明’ [ Joint Statement of the
President of the People’s Republic of China and the President of the Russian Federation on Pre-2030 Develop-
ment Plan on Priorities in China-Russia Economic Cooperation], Ministry of Foreign Affairs of the People’s
Republic of China, 22 March 2023, https://www.mfa.gov.cn/zyxw/202303/t20230322_11046176.shtml; Chen
Weihua, ‘Diversification of Brazil’s Exports to China to be Tapped’ [巴西对华出口多样化有待挖潜], 经济
参考报 [Economic Information Daily], 1 June 2022, http://www.jjckb.cn/2022-06/01/c_1310610291.htm; ‘国
家发展改革委与巴西发展, 工业, 贸易和服务部签署关于促进产业投资与合作的谅解备忘录’ [China’s Na-
tional Development and Reform Commission and Brazil’s Ministry of Development, Industry and Foreign Trade
Signed a Memorandum of Understanding on Promoting Industrial Investment and Cooperation], National De-
velopment and Reform Commission of the People’s Republic of China, 17 April 2023, https://www.ndrc.gov.cn/
fzggw/wld/zsj/zyhd/202304/t20230417_1353652.html.   
20 WENHUA ZONGHENG

to higher inflation rates in the West. During the Nixon administration, then
US Treasury Secretary John Connally famously remarked, ‘The dollar is our
currency, but it’s your problem’. According to former Credit Suisse analyst
Zoltan Poszar, this is now being replaced by a new motto: ‘Our commodity,
your problem’.20

RMB or Common Currency?

Where is the Global South’s de-dollarisation trend heading? In the current

debate, many believe that China’s RMB will replace the US dollar, while oth-
ers have high hopes for the development of a common currency backed by oil.
Both routes have their challenges.

Let us first look at RMB internationalisation. From a geopolitical perspec-

tive, this is widely seen as a major threat to the US dollar. There is no doubt
that the US opposes the internationalisation of the RMB and pressures other
countries on this issue. A recent example is Saudi Arabia, which has indicated
that it will consider using other currencies to settle its energy trade but has yet
to issue an official statement on the matter. Meanwhile, in March and April
2023, the Indian government explicitly opposed the country’s companies set-
tling energy imports from Russia in RMB. In July, under pressure from Russia,
India had to pay a small portion of energy imports in RMB. However, this is
because, under Western economic sanctions, Russia exported oil to India at a
very low price; hence, India’s huge benefits greatly outweighed its geopolitical
concerns about the RMB’s expanding influence. Energy resource exporters are
relatively more receptive to settling in RMB because they all have large trade
surpluses with China. For countries with large trade deficits with China, set-
tling in RMB would not address their settlement cost concerns with the US
dollar, and it actually would be more costly.

Moreover, replacing the dollar with the RMB would not resolve the paradox
that is responsible for the dysfunctionality of the international monetary sys-
tem. As the Brazilian economist Paulo Nogueira Batista Jr. pointed out, ‘[t]
he fundamental contradiction [...] lies in the fact that the international system
depends on a single national currency, managed according to the interests of

²⁰ Pozsar, ‘War and Commodity Encumbrance’.   

 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 21

the state that created it’. The United States tends to formulate financial poli-
cies to serve its interests, which are not always in line with those of the inter-
national financial system and, in many cases, the two conflict with each other.
Thus, even if the Global South countries continue to work to de-dollarise, they
would not support another country’s currency assuming the US dollar’s role as
the new key currency.21

So far, RMB internationalisation has not taken the US dollar as a reference

point but has followed its own path. First, the RMB has not achieved free cur-
rency convertibility, without which it cannot provide other countries with the
same efficiency and ease of use in international trade settlements as the dollar.
Second, for a national currency to become a major world reserve currency, the
home country must have a developed financial market, sufficient financial in-
struments available for investment, and capital account liberalisation. Howev-
er, China’s financial sector remains relatively underdeveloped and the country
has always regarded national financial security as a top priority. Third, as the
key global currency, the dollar provides liquidity to other countries. However,
as a manufacturing giant with a large population and a high pressure to main-
tain employment, China cannot provide liquidity to other countries through
a large current account deficit as the United States does. Under these inter-
nal and external constraints, the impact of different RMB internationalisation
paths on the Chinese economy remains to be explored.

There is a risk in using local currency settlements for bilateral trade in the Glob-
al South: if the deficit country’s currency underperforms, the surplus country
is likely to give up its long-term holdings; if the surplus country chooses to
sell, the deficit country’s currency is at risk of further depreciation.22 While
there are certainly real economic fundamentals and the impact of US interest
rate hikes behind the recent RMB depreciation, another important reason is
the effect of currency swaps and RMB settlements, given that the RMB is not
freely convertible. For example, Russia suddenly possesses a large amount of
RMB through its energy trade surplus with China, but there is no channel for

²¹ Paulo Nogueira Batista Jr., ‘A BRICS Currency?’ (paper, BRICS Seminar on Governance & Cultural Exchange
Forum 2023, Johannesburg, South Africa, 19 August 2023), https://www.nogueirabatista.com.br/wp-content/
uploads/2023/09/Aug-2023-On-possible-BRICS-currency.pdf. A version of this paper was published on the
Chinese media platform, Guancha.   
²² Nogueira Batista, ‘A BRICS Currency?’.   
22 WENHUA ZONGHENG

these RMB to flow back to China because China does not have a developed
financial market or sufficient financial instruments for Russian investment.
Under these conditions, it becomes a reasonable choice for Russia to maintain
the ruble’s exchange rate either by selling large sums of RMB or by selling
RMB acquired at parity for dollar profits against the backdrop of the dol-
lar’s appreciation against the RMB. As long as China’s financial markets and
instruments are not developed to provide sufficient channels for the return of
the ‘oil RMB’ to China, countries with large surpluses will have an incentive
to sell RMB for other currencies, thus creating pressure to devalue the RMB.
Whether China is willing to bear this burden of RMB internationalisation in
the long term remains to be seen.

Now, let us turn to the prospects for a common BRICS currency. The strength
of the BRICS has indeed grown rapidly, laying a solid foundation for launch-
ing a BRICS currency. For reference, when the G7 was founded in the 1970s,
the group’s share of global gross domestic product (GDP) was as high as 62
percent; today, the BRICS countries have surpassed the G7 in terms of their
respective shares of global GDP, measured at purchasing power parity (PPP).
According to the International Monetary Fund (IMF), in 2021, the BRICS
collectively accounted for 31.5 percent of global GDP (PPP), whereas G7
accounted for 30.7 percent.23 The IMF projects that by 2028, the expanded
BRICS10 (including Egypt, Ethiopia, Iran, Saudi Arabia, and the UAE) will
account for 37.9 percent of global GDP (PPP), with the G7’s share falling to
27.8 percent.24 With major energy exporters such as Saudi Arabia, Iran, and
the UAE having joined the BRICS cooperation mechanism in 2024, the like-
lihood of a BRICS currency has further increased. In the future, if the BRICS
can cooperate with OPEC in developing a BRICS currency, such an initiative
may surpass the limitations of the BRICS member countries and greatly en-
hance the material basis of a BRICS currency.

However, there are still significant challenges to issuing a BRICS currency

underpinned by oil. First, the underpinning of the US dollar by oil is guar-

²³ Calculated from the International Monetary Fund’s World Economic Outlook database (October 2023), https://
www.imf.org/external/datamapper/PPPSH@WEO/MAE/BRA/RUS/IND/CHN/ZAF?year=2021.   
²⁴ Calculated from the International Monetary Fund’s World Economic Outlook database (October 2023), https://
www.imf.org/external/datamapper/PPPSH@WEO/MAE/BRA/RUS/IND/CHN/ZAF/EGY/ETH/IRN/
SAU/ARE?year=2028.   
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 23

anteed through the exclusivity of the US-Saudi agreement to price oil only
in US dollars. Countries use the US dollar as a foreign exchange reserve to
ensure that their energy imports are not subject to exchange rate fluctuations,
thus indirectly securing the US dollar’s status as a key global currency. Would a
BRICS currency be able to establish exclusivity in oil and gas pricing and set-
tlements in the international energy market, thus supporting its transforma-
tion into a reserve currency for countries? Unless the BRICS countries want
to go to war with the United States, it seems unlikely. Would it be possible for
a BRICS currency to become one of several currencies for oil and gas pric-
ing and settlements? The answer is yes, but a BRICS currency would still face
fierce competition from the US dollar, which has the world’s largest financial
markets and most developed financial instruments, especially the massive US
Treasury market. Second, developing an oil-based BRICS currency is easier
said than done. To underpin a currency with oil, a fixed exchange rate must
be established between a certain unit of oil and a certain unit of the currency.
Yet, even if a fixed exchange rate is established between a BRICS currency and
oil, when the price of oil rises in the international market, who will BRICS
currency holders turn to for oil at the fixed exchange rate?25 When designing
the Bretton Woods system, John Maynard Keynes had also envisioned the es-
tablishment of an exchange rate between oil and the dollar, but he found that
the types and quality of oil were too numerous and varied too significantly
from country to country, so this was not operational in practice. In the end, he
decided to use gold.26

Local Currency Settlement, Reference Values, and Exchange

Platform

For Global South countries, the greatest common denominator for future
joint action is the demand for local currency settlement, which is shared across
the various de-dollarisation propositions put forward today. In recent years,
several agreements have been reached between BRICS countries to use local
currencies for bilateral trade, including China and Russia, China and Brazil,
and Russia and India’s energy trade. Furthermore, in 2023, the Association of

²⁵ Nogueira Batista, ‘A BRICS Currency?’.   

²⁶ Rickards, interview.   
24 WENHUA ZONGHENG

Southeast Asian Nations (ASEAN) met to discuss reducing their reliance on

the US dollar, Euro, British pound, and Japanese yen for financial transactions
and issued a declaration on the promotion of local currency trading schemes.
ASEAN plans to expand its cross-border digital payment system further and
allow ASEAN countries to trade in local currencies. This will encourage cross-
border trade and investment within the ASEAN grouping and reduce the
impact of external factors on the regional economy. Southeast Asia is often
subject to economic volatility due to abrupt policy changes at central banks in
the United States and other countries and regions; as such, ASEAN countries
would like to increase the use of local currencies to promote economic stability
and reduce the spillover effects of high inflation in developed countries.27

For various reasons, it is difficult to establish a direct and relatively stable ex-
change rate between two currencies with limited international circulation.
Therefore, when making local currency settlements, it is often necessary to
resort to a reference to help the parties establish their relative values vis-à-vis
each other. This creates an opportunity for the development of a BRICS cur-
rency. If a relatively stable exchange rate is established between a BRICS cur-
rency and the sovereign currencies of the respective BRICS member countries,
it can serve as a reference value between the currencies of the different member
countries.

Russia and Brazil, both proponents of de-dollarisation, have put forward dif-
ferent views on whether and how to anchor a BRICS currency. On the one
hand, Russia has favoured anchoring a BRICS currency in gold, establish-
ing an exchange rate between a unit of BRICS currency and a unit of gold.
The challenge with this option is that central banks would have to stockpile
large amounts of gold.28 US financial expert James Rickards, inspired by the
Russian view, has instead suggested that a BRICS currency use gold only as
a reference value and not to underpin the currency, thereby allowing BRICS
central banks to avoid the need for gold redemption for BRICS currency hold-
ers. Such a BRICS currency would not replace the US dollar but coexist with
it and reflect its value to a large extent with the help of the US dollar. Since

²⁷ ‘ASEAN’s Aim to Increase Monetary Autonomy Reflects De-Dollarization Trend, Says Indonesian Econo-
mist’, Xinhua News Agency, 5 April 2023, https://english.news.cn/20230405/6b25f882f66047da8fb0231d3411d
45f/c.html.   
²⁸ Rickards, interview; Nogueira Batista, ‘A BRICS Currency?’.   
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 25

gold is denominated in dollars on the international market, the fixed relation-

ship between a BRICS currency and gold will also be reflected in the dollar-
denominated price of gold.29 According to Rickards, the dollar will depreciate
in the long-term; however, even if the dollar does depreciate in the future, this
would not negatively impact a BRICS currency because a depreciation of the
dollar would lead to an appreciation of gold and, at the same time, an appre-
ciation of a BRICS currency. Under this framework, the US dollar would bear
the burden of being the key global currency, while the BRICS currency would
merely need to coexist and reap the benefits. As the BRICS grows to thirty or
forty members, there would be no major obstacles to the internal circulation
of such a BRICS currency; the diversity of trade among the BRICS members
would be sufficient to support the currency’s settlement efficiency and ease of
use.30

On the other hand, Nogueira Batista, former vice president of the New De-
velopment Bank (NDB), has put forward an influential view that opposes an-
choring a BRICS currency in gold or any other commodity. Instead, it would
be preferable to build a BRICS currency as a basket of currencies similar to
the IMF’s Special Drawing Rights (SDR), in which the relative weight of each
BRICS member’s currency would be determined according to its economic
strength. Such a BRICS currency would not need to replace national cur-
rencies – countries would retain their monetary sovereignty – and would not
require the BRICS to establish a unified central bank – the New Development
Bank (NDB) could undertake the issuance of the currency.31 How could this
BRICS currency be widely accepted without an anchor asset that is freely con-
vertible at a fixed exchange rate? Following Nogueira Batista’s logic, the credit
of the BRICS currency would be backed by the currencies of the respective
BRICS member countries. BRICS currency holders would have the right to
freely convert it into their currencies at any time. The NDB would ensure the
convertibility of the BRICS currency, relying on its reserves and, when neces-
sary, seeking additional funds from countries that issue internationally liquid
currencies to support the BRICS currency. Another confidence-boosting op-

²⁹ Rickards, interview.   
³⁰ Rickards, interview.   
³¹ Nogueira Batista, ‘A BRICS Currency?’; Federico Steinberg and Miguel Otero-Iglesias, ‘South America’s
“Common Currency” Is Actually about De-Dollarization’, Center for Strategic and International Studies, 14 Feb-
ruary 2023, https://www.csis.org/analysis/south-americas-common-currency-actually-about-de-dollarization.
26 WENHUA ZONGHENG

tion would be for the NDB to issue BRICS bonds of varying maturities and
interest rates, while allowing the BRICS currency to be freely convertible into
BRICS bonds.32

Initially, a BRICS currency is likely to serve only as a unit of account, provid-

ing a reference value for the BRICS member countries when settling bilateral
trade in their local currencies, thus reducing the current cost of settling in US
dollars. A BRICS currency would be freely convertible with the currencies of
BRICS member countries but would lack the systemic characteristics of a key
currency like the US dollar. Nonetheless, it could still help the BRICS coun-
tries hedge some of the risks the US dollar poses. The Euro was born partly
out of Europe’s desire to avoid the negative externalities of US financial policy.
While the Euro has been far from successful in competing with the dollar as
a key international currency, it has been successful in helping to insulate the
eurozone from the dollar cycle.33 It may be easier to establish political con-
sensus among the BRICS countries around a currency that coexists alongside
the US dollar. At the 2023 BRICS summit, both Russian President Vladimir
Putin and Brazilian President Luiz Inácio Lula da Silva actively pushed for
de-dollarisation; however, the host government, South Africa, did not include
de-dollarisation as an official topic under pressure from the US, while India
explicitly opposed the option of a head-to-head confrontation with the US.
With Russia hosting the 2024 BRICS summit, it can be expected that the
Russian government will push hard for de-dollarisation. Yet, as long as the
BRICS decision-making process adheres to the principle of consensus, the
position of countries such as India is bound to abort any radical programmes.
Given the BRICS international political structure, a BRICS currency is more
likely to move forward if it has a relatively straightforward initial functionality
– emphasising only the basic function of serving as a unit of account to facili-
tate local currency settlements in trade among BRICS countries – rather than
an initiative that more deliberately confronts the US dollar.

Observers tend to believe that an initial BRICS currency will not be used for
personal consumption but only for international trade settlements between
banks. It is likely that a BRICS currency will be launched as a digital currency
and will be linked to the digital currencies actively promoted by various coun-

³² Nogueira Batista, ‘A BRICS Currency?’.   

³³ Steinberg and Otero-Iglesias, ‘South America’s “Common Currency”’.   
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 27

tries’ central banks.34 Therefore, creating an international platform to support

the exchange of digital currencies will not only be important for a BRICS
currency, but will also be necessary infrastructure for the future international
financial system. In 2021, the Hong Kong Monetary Authority, the Digital
Currency Institute of the People’s Bank of China, the Bank of Thailand, and
the Central Bank of the United Arab Emirates jointly launched a multi-cen-
tral bank digital currency bridge (mBridge), a cross-border payment system
that can be used as an alternative to SWIFT. During its trial period from
August to September 2022, the four central banks issued $12 million worth of
digital currencies on mBridge, while twenty commercial banks used the digi-
tal currencies on the platform on behalf of their clients to conduct more than
160 payments and foreign exchange (FX) and payment versus payment (PvP)
transactions, with a total value of $22 million.35

This digital currency exchange platform, underpinned by blockchain technolo-

gy, is of great significance to Global South countries. High-value, high-volume
wholesale international payments between financial institutions are currently
a major component of cross-border transactions. This wholesale interbank FX
market provides incentives and liquidity for a wide range of retail operations.
However, this form of FX trading is subject to settlement risk. As it still takes
one to two days to complete a cross-border payment, when one party has com-
pleted the payment, the other party will not have immediately received it. This
risk affects up to $6.6 trillion worth of transactions per day in the international
FX market, and more than half of the daily cross-border transactions lack in-
surance mechanisms. In addition, the system does not work around-the-clock,
which also inconveniences both sides of the transaction. PvP is an important
solution as it eliminates settlement risk and reduces friction by ensuring that
both parties confirm and receive payments simultaneously. Moreover, mBridge
functions around-the-clock, year-round, and both transaction parties decide
when to complete the settlement. Central banks in all countries have a huge
demand for this service. While some developed markets already offer PvP ser-
vices, they do so in a limited number of currencies, completely ignoring the

³⁴ Rickards, interview; Andy Schectman, ‘It Would Be “Really Foolish” to Underestimate Gold-Backed BRICS
Currency’, interview by Jesse Day, Commodity Culture, YouTube, 12 July 2023, https://www.youtube.com/
watch?v=gxy4IW8R5ho.   
³⁵ BIS Innovation Hub et al., ‘Project mBridge: Connecting Economies through CBDC’ (Bank for International
Settlements, October 2022), https://www.bis.org/publ/othp59.pdf.   
28 WENHUA ZONGHENG

ever-growing currency demands from the Global South. Replacing the ser-
vices provided by traditional banks will require shifting essential infrastructure
facilities into a completely new processing model, utilising distributed ledger
technology and digital currencies. Banks in many developed countries are not
yet ready to meet these challenges.36

Discussion

The pendulum movement of globalisation, the hegemonic cycle, and techno-

logical revolution have brought the world into an era of ‘changes unseen in
a century’. How should we interpret the Global South’s de-risking and de-
dollarisation in this period? How should we understand the expansion of the
BRICS and its impact on the future international order? And how can we
identify the trajectory and future direction of China’s exploration in the twen-
ty-first century?

First, as de-dollarisation continues, a conflict may arise in the future between a

multi-currency financial system and the post-war multilateral trading system,
further intensifying de-globalisation. The US dollar has various disadvantages
as the global reserve currency, but its settlement efficiency and ease of use
have made it an indispensable component of the post-war multilateral trading
system. In the future international financial system, while countries may shun
the dollar or even adopt barter trade as a transaction form, they will not use an
inconvenient currency as their primary reserve currency. In the era of globali-
sation, cost and quality determined the flow of goods and services. Today, the
declining influence of the US dollar signals the demise of this efficient busi-
ness model, and the flow of goods and services begins to depend on the will-
ingness of exporting countries to accept a particular country’s currency. When
countries no longer accumulate surpluses in their current accounts as a means
of acquiring a reserve currency, they may resort to restricting trade and em-
ploying other distortionary methods to maintain balance in bilateral trade.37

³⁶ Dave Sissens, ‘Why the Increased Adoption of PvP Settlement Will Enhance Cross-Border Payments’, Fintech
Futures, 23 January 2023, https://www.fintechfutures.com/2023/01/why-the-increased-adoption-of-pvp-settle-
ment-will-enhance-cross-border-payments/.   
³⁷ Benn Steil, ‘The Real Cost of De-Dollarization’, Project Syndicate, 16 August 2023, https://www.project-syn-
dicate.org/commentary/no-alternative-to-the-us-dollar-by-benn-steil-2023-08.   
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 29

Second, the West’s weaponisation of the US dollar after the outbreak of the
Russia-Ukraine War and the de-dollarisation efforts of Global South countries
indicate that both developed and developing countries are frustrated with the
post-Cold War international order established by US hegemony. The West’s
attempts to decouple or de-risk from China and Russia are shaking the dollar’s
hegemonic status. Meanwhile, the attempts to return to a Cold War situation
are likely to be counterproductive in the end, seriously weakening the West’s
own position in the international order. This is because the decoupling of the
West and the de-risking of the Global South are giving rise to a ‘systemic rival’
that surpasses the Western alliance in terms of population, the size of the real
economy, energy, resources, and industrial manufacturing capacity. The balance
of power between the West and the Global South countries today is very dif-
ferent from the balance that existed during the Cold War between the West
and the former Soviet bloc.

Third, technological development will be a critical enabler of local currency

settlements for Global South countries in the future. Both mBridge and a fu-
ture BRICS currency will support transactions through digital currencies and
use blockchain as the underlying technology. To move away from the high cost
of traditional banking services in developed countries, Global South countries
have been building a new generation of financial infrastructure facilities based
on contemporary information technologies.

Finally, China’s long exploration of a relationship between its own develop-

ment and the international environment seems to have found a clear outline.
From its full integration into Western-dominated globalisation at the end of
the twentieth century and the beginning of the twenty-first century, to its Belt
and Road Initiative (BRI) aimed at promoting Eurasian economic integra-
tion over the past decade, to the establishment of the Shanghai Cooperation
Organisation (SCO) and the BRICS mechanism, China has ultimately priori-
tised cooperation with Global South countries.

The geographical distribution of the six countries invited to become members

indicates the priorities of the BRICS and China in their future development
strategies. First, five of the six invitees are located around major transport routes
such as the Strait of Hormuz, the Red Sea, and the Suez Canal, suggesting that
the BRICS countries, including China, are placing more emphasis than ever
30 WENHUA ZONGHENG

on the Middle East as a hub connecting Asia and Africa. In China’s previous
spatial projections of the BRI, Europe was the western terminus and South-
east Asia was the important southeastern end. However, under the conditions
of the United States’ ongoing Indo-Pacific strategy and Europe’s tightening
policy, China not only mediated the historic rapprochement between Saudi
Arabia and Iran in March 2023 but also brought the two countries into the
BRICS. Such an emphasis on the Middle East signals that the BRI’s future
development will probably tilt even more towards the region. The ultimate aim
is to establish a land bridge between Asia and Africa, transforming these two
continents into the main arena for collective actions by the BRICS countries
in the Global South.

Second, the invitation of energy giants such as Saudi Arabia, Iran, the UAE,
and Argentina represents a shift in the Global South, beyond individual initia-
tives and moving towards institutionalised efforts on a global scale to de-risk
from the weaponisation of the US dollar. This development lays a significant
foundation for the creation of a BRICS currency. The expanded BRICS in-
cludes six of the world’s top ten oil producers in 2022 (which together ac-
counted for 40 percent of the world’s oil production) and five of the world’s
top seven oil consumers in 2021 (which together accounted for 30 percent of
the world’s oil consumption.38 With such a concentration of production ca-
pacity and consumption, the creation of a BRICS currency – first and foremost
for energy trade among member countries – seems to be on the horizon.

Nevertheless, China took a low-key stance on de-dollarisation at the 2023

BRICS summit. Unlike Putin and Lula, who explicitly advocated de-dollari-
sation, President Xi Jinping, when speaking on the topic, only said, ‘We need
to fully leverage the role of the New Development Bank, push forward reform
of the international financial and monetary systems, and increase the repre-
sentation and voice of developing countries’.39 This relatively moderate stance
is much closer to that of most Global South countries. Even today, China
still owns $830 billion in US Treasury bonds and $2 trillion in other dollar-
denominated assets. In this sense, China remains embedded in an interna-

³⁸ US Energy Information Administration, ‘What Countries Are the Top Producers and Consumers of Oil?’, 2
September 2023, https://www.eia.gov/tools/faqs/faq.php.   
³⁹ Xi Jinping, ‘Remarks by Chinese President Xi Jinping at the 15th BRICS Summit’, Xinhua News Agency, 23
August 2023, https://english.news.cn/20230823/54dbd48e5e4f40f7bc2f15a1a7a3ab59/c.html.   
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 31

tional financial system in which the US dollar is the key currency. Also, amid
the intensifying competition between China and the United States, holding
US Treasury bonds remains one of the few vital leverage points that China
has to respond to US pressure. Constrained by these circumstances, China is
unlikely to aggressively pursue de-dollarisation. Losing its leverage could not
only make it more difficult for China to counterbalance US strategic pressures
but could also lead to mutual harm in the event of a strategic miscalculation
by the United States.

Since the US ‘pivot to Asia’, China’s response and international strategy –

which included the creation of the BRI – has consistently kept open two pos-
sibilities: hedging or confronting. A century ago, the resonance of the three
major historical cycles of globalisation, hegemony, and technological revolu-
tion pushed the world into an abyss. Today, a situation has again emerged in
which these three cycles are simultaneously exerting influence: the pendulum
of globalisation is shifting from market fundamentalism to protectionism, the
hegemonic cycle is entering a phase where emerging powers are approaching
and challenging the hegemonic power, and the technological revolution is rap-
idly altering the international political and economic power dynamics. A cen-
tury ago, facing the crises created by these three primary cycles, nations chose
confrontation, resulting in the ultimate tragedy of two World Wars and im-
mense human suffering. Today, war is raging in Ukraine and elsewhere, while
the weaponisation of the US dollar and the de-risking efforts of the Global
South are accelerating the collapse of the post-Cold War unipolar world.

As the wheels of history once again bring the world to a pivotal crossroads,
the Global South’s convergence towards the BRICS cooperation mechanism
provides China with a new opportunity to hedge against growing dangers.
Positioned within an international organisation featuring the most powerful
developing countries, wielding a BRICS currency that coexists with the US
dollar, and commanding significant global capabilities in energy, resources, and
industrial manufacturing, China will enhance its ability to drive changes in the
international political and economic order. So too will the representation and
influence of the Global South increase in international affairs.
32 WENHUA ZONGHENG

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34 WENHUA ZONGHENG
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 35

What Is Driving the BRICS’

Debate on De-Dollarisation?

‘What Is Driving the BRICS’ Debate on

De-Dollarisation’ (金砖国家高调协商“
去美元化”的背后) was originally pub-
lished by Wenhua Zongheng (文化纵
横) as a New Media special feature ( Janu-
ary 2024).

Ahead of the 2023 BRICS summit in

Johannesburg, South Africa, there was
Ding Yifan (丁一凡) is an much discussion amongst the member
economist and former deputy countries about whether negotiations
director of the World Devel- would take place at the meeting regard-
opment Institute of the De-
velopment Research Center of
ing the development of a BRICS cur-
China’s State Council (2000– rency and the acceleration of de-dollari-
2014). He is a senior fellow at sation, that is, the promotion of currency
the Taihe Institute and a for- cooperation and reduction in the use of
mer visiting scholar at Johns
Hopkins University’s School of the US dollar. In the end, the country
Advanced International Stud- leaders did not specifically discuss the
ies. He has written extensively issue of a BRICS currency but passed
on development, economic glo-
balisation, US dollar hegemony, a resolution on expanding the organisa-
the knowledge-based economy, tion’s membership. Nonetheless, from
and the European debt crisis for both historical and realist perspectives,
Chinese, English, and French-
language publications.
it is in the interest of the BRICS coun-
tries to promote de-dollarisation.
36 WENHUA ZONGHENG

The Impact of US Dollar Hegemony on the BRICS Countries

Historically, the core BRICS countries have suffered from the hegemonic role
of the US dollar. Throughout its history, Brazil has been exploited by British
and US capital, with various methods of profiteering having emerged. After
the collapse of the Bretton Woods system, the US dollar has floated freely. Any
substantial appreciation or depreciation of the US dollar has spelled disaster
for Brazil. US capital has also been able to enter and exit the Indian stock mar-
ket freely, bidding up prices of certain stocks and then short-selling them. This
has brought about huge fluctuations in the Indian stock market and caused
some important Indian companies to suffer from excesses and shortages of
capital liquidity.

Meanwhile, South Africa, Russia, and China have been subjected to US fi-
nancial sanctions. The US has imposed fines and sanctions on South African
financial firms for alleged money laundering and violations of economic sanc-
tions that the US has enacted against other countries. There are countless ex-
amples of US sanctions against the Russian government and various Russian
companies. After the war in Ukraine broke out, the United States froze and
confiscated the US dollar assets held by several wealthy Russian citizens, and
also froze $300 billion in assets of the Russian Central Bank and threatened
to confiscate them to subsidise Ukraine’s war effort. Of course, because Russia
has threatened to retaliate in kind and confiscate Western assets in Russia, this
has not escalated beyond a ‘war of words’.

In the past, the United States has accused China of being a currency manipu-
lator because of its significant holdings of US dollar assets and once imposed
sanctions on China based on the allegation that China’s sharp increase in ex-
ports was due to manipulation of the RMB exchange rate. However, it is the
US that disproportionately benefits from this relationship. On the one hand,
the US imports a large number of manufactured products from China, ben-
efiting from cheap goods to lower its inflation rate; on the other hand, China
earns a large amount of US dollars but has no place to invest them, and so
has no choice but to purchase US treasury bills, thereby providing the United
States with cheap capital. Despite this double victory, the US wishes to exert
further pressure on China. As such, the US falsely complains of China’s so-
called exchange rate manipulation; in reality, the US wants to force China to
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 37

accept RMB appreciation and open its financial market, thereby creating an
imported financial asset bubble. Thus far, these efforts have been wasted, as
China has not yielded to US pressure.

In addition to the core BRICS countries, the organisation’s new members have
also experienced many entanglements with the US dollar. Saudi Arabia, the
United Arab Emirates, and Iran are all producers and exporters of oil and
natural gas. In 1971, amid the US dollar crisis, then US President Richard
Nixon closed the window for the free convertibility of US dollars into gold so
that the US dollar could depreciate sharply. The US dollar is the principal pric-
ing currency for oil, and its depreciation caused oil prices to skyrocket. At that
time, oil-producing countries did not have the ability to extract and refine oil.
Oilfield development was managed by British and US oil companies, which
only paid the oil-producing countries an annual fixed extraction fee priced in
US dollars. With the US dollar depreciating and oil prices skyrocketing, the
distribution of profits became unfair. The oil-producing countries demanded
a new arrangement, but the British and US oil companies refused. After the
outbreak of the Arab-Israeli War in 1973, the oil-producing countries jointly
launched an oil embargo against Israel and its allies. Only after the first oil
shock did the oil-producing countries regain their bargaining power vis-à-vis
Western oil companies.

The US Dollar Has Impeded International Cooperation

In an era where the world is moving towards a multipolar order, the hegemony
of the US dollar has hindered international cooperation between many coun-
tries. Since its ‘war on terror’, the United States has discovered that, compared
with traditional trade wars, it is much more effective to use the hegemony of
the dollar to impose financial sanctions on countries that violate the US-led
‘rules-based order’. This logic was detailed by Juan Zarate, a former US official
under the administration of George W. Bush, in his 2013 book Treasury’s War:
The Unleashing of a New Era of Financial Warfare. In recent decades, the US
has frequently used the dollar as a weapon to impose financial sanctions on
countries that it does not like.
38 WENHUA ZONGHENG

The United States relies on its domestic laws to justify imposing sanctions on
foreign companies and governments around the world, a practice known as
‘long-arm jurisdiction’. On top of this, if non-sanctioned actors do not follow
US sanctions against a country and dare to defy Washington’s will, they too
may become targeted by secondary sanctions. The US dollar settlement system
has become an instrument that the US uses to determine who has complied
with or defied its bans on doing business with sanctioned countries and to
impose costly sanctions on those who are not compliant. The US government
has fined many European banks billions of dollars for alleged violations of US
sanctions.

In recent years, there have been a growing number of cases in which the Unit-
ed States has abused the use of financial sanctions. As a result, countries with
large amounts of US dollar financial assets have developed concerns about
the long-term security of their holdings. The case of Iran is instructive. The
Iran nuclear agreement was reached in 2015 between Iran and the permanent
members of the United Nations Security Council – the United States, the
United Kingdom, Russia, France, and China – as well as Germany and the
European Union. Under this framework, all nuclear-related economic sanc-
tions against Iran would be lifted, and the country could engage in greater
international cooperation. Following the deal, European-Iranian cooperation
progressed smoothly, with many European companies strengthening their ties
with Iran and conducting settlements in euros. However, after Donald Trump
came to power in the US, he abolished the Iran nuclear agreement, re-imposed
sanctions on Iran, and forced European companies to withdraw from the Ira-
nian market. These practices ignited fears in many Middle Eastern countries
about their future fate. Historically, the US provided security guarantees to
many countries in the region, with these countries obliged to purchase large
amounts of US financial assets to provide the United States with cheap capital.
If relations between Iran and Arab countries in the Middle East were to im-
prove and US ‘security’ was no longer needed, would these countries continue
to purchase so many US dollar assets? Washington’s blatant announcement
that it would confiscate Russia’s US dollar assets following the outbreak of war
in Ukraine has only intensified concerns among Arab countries. Unlike Russia,
these countries do not possess nuclear weapons, nor can they match Russia’s
military capabilities. If the US were to use its ‘long-arm jurisdiction’ to freeze
or confiscate their US dollar assets, they would have no power to fight back.
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 39

These experiences pose important questions for BRICS countries, many of

which have been subject to varying degrees of US sanctions. If the BRICS
countries cannot develop a settlement mechanism other than the US dollar for
cross-border cooperation, many more countries may be targeted by US sanc-
tions in the future.

Likewise, despite the successes of the Belt and Road Initiative (BRI) that Chi-
na launched ten years ago, many Global South countries have fallen into the
US dollar trap again. This is because the US Federal Reserve sharply raised
interest rates in 2023, which caused capital flight in these countries and made
their dollar debt interest rate unserviceable. De-dollarisation is the only choice
to ensure the BRI’s continued success in the future.

The US Dollar Carries Significant Financial Risks

Even from the perspective of financial asset protection, it is risky for any coun-
try to hold too many US dollar-denominated assets. This risk is inherent to fiat
money. In the era of precious metals, the basis for issuing currency was pre-
cious metal reserves. If there was too much outflow of gold and silver, it would
cause a currency crisis. After the collapse of the Bretton Woods system, the
last bastion of the gold standard was destroyed and the world entered the age
of fiat money. The basis of legal currency is government credit; in other words,
government debt is the basis of currency. The more debt the government issues,
the more currency flows into the market. However, the level of government
debt must match the government’s fiscal revenue and the debt must match the
size of the economy. Otherwise, debt sustainability cannot be guaranteed and
a debt crisis will erupt. The debt crisis will destroy the confidence of currency
holders, thus triggering a currency crisis.

Since the beginning of the twenty-first century, US government debt has

climbed beyond any historical record. When George W. Bush left office, US
government debt exceeded $10 trillion; when Barack Obama left office, US
government debt had climbed to $20 trillion; during Donald Trump’s four
years in power, US government debt rose to $26 trillion; finally, in the three
years of the current administration of Joe Biden, US government debt has ex-
ceeded 34 trillion. In 2020, the ratio of US government debt to gross domestic
40 WENHUA ZONGHENG

product surpassed 130 percent. As the Federal Reserve has raised interest rates,
interest rates on US Treasury bills have risen rapidly. In 2024, the US govern-
ment’s interest payments on the national debt will exceed $1 trillion, exceeding
the official military budget.1 Such a high level of debt raises concerns that the
US government will default sooner or later.

Following the 2008 international financial crisis, US economists Carmen M.

Reinhart and Kenneth S. Rogoff published This Time Is Different: Eight Cen-
turies of Financial Folly (2009). The book reveals a profound historical truth:
when the debt burden of sovereign countries has become too heavy, all of
them, without exception, have relied on inflation and currency devaluation
to write off their debt and escape the crisis. When the US government’s debt
reaches such a high level, does anyone still believe that it will be able to escape
this historical fate?

In fact, the US government has a long history of breach of contract. In 1971,

US debt skyrocketed and the US dollar was in crisis. President Nixon decided
to decouple the US dollar exchange rate from the price of gold. The US dol-
lar depreciated sharply, and the Bretton Woods international financial system
collapsed. The background of that US dollar default was the Vietnam War.
The rising military expenditures of the United States for the war and the sharp
increase in debt caused by the fiscal deficit caused Western European coun-
tries to lose confidence in the US dollar. Similarly, after the outbreak of the
war in Ukraine, the US continued to allocate funds to provide military aid to
Ukraine. The US budget deficit also continued to rise, the financial burden
continued to increase, and the national debt quickly exceeded the ceiling set
by Congress. Negotiations between the Biden administration and Congress
to raise the debt ceiling have become a perennial fixture on the US political
scene. Since October 2023, the US has become involved in yet another ‘proxy
war’, supporting Israel’s military campaign in Gaza with increasing military

1
In 2022, US military spending reached $1.53 trillion, more than twice that acknowledged by the US gov-
ernment. See Gisela Cernadas and John Bellamy Foster, ‘Actual US Military Spending Reached $1.53 tril-
lion in 2022 – More than Twice Acknowledged Level: New Estimates Based on US National Accounts’,
Monthly Review, 1 November 2023, https://monthlyreview.org/2023/11/01/actual-u-s-military-spend-
ing-reached-1-53-trillion-in-2022-more-than-twice-acknowledged-level-new-estimates-based-on-u-s-
national-accounts/; Tricontinental: Institute for Social Research, Hyper-Imperialism: A Dangerous Deca-
dent New Stage, Studies on Contemporary Dilemmas no. 4, 23 January 2024, https://thetricontinental.org/
studies-on-contemporary-dilemmas-4-hyper-imperialism/.
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 41

expenditures. As the US participates in two simultaneous ‘proxy wars’, one is

left to ask, how long can the US government finance its military excursions?

We can see that there are many reasons for the BRICS countries to choose to
strengthen monetary cooperation and accelerate the de-dollarisation process.
The development of modern communications and settlement technologies,
such as blockchain, has also provided a safer path for BRICS countries to
de-dollarise.

History Serves as a Mirror to Illuminate the Direction of

Future Development

Although the BRICS countries are eager to de-dollarise, how can they achieve
this goal? Historical experience can provide us with certain insights. After the
collapse of the Bretton Woods system in the 1970s, the depreciation of the
US dollar caused global inflation. Although the value of the US dollar has
become unstable, it remains the most used currency in the world due to inertia
in currency use. When many countries are accustomed to using a certain cur-
rency in international trade and cross-border investment, they are less willing
to change their habits. In addition, after the first oil crisis, then US Secretary
of State Henry Kissinger engaged in ‘shuttle diplomacy’, continuously visit-
ing the oil-producing countries of the Middle East. Eventually, he convinced
Saudi Arabia to set the US dollar as the only currency for oil pricing and Saudi
Arabia, in turn, persuaded other oil-exporting countries to do the same. The
United States has given these countries, which hold large amounts of US dol-
lars, the financial privilege of directly purchasing US treasury bills in the pri-
mary market. The oil-producing countries in the Middle East have embraced
the idea, and it has been extremely profitable. The trading of oil futures is the
world’s largest commodity market; once oil was priced in US dollars, a huge
demand was created. Other commodity futures trading immediately copied
the oil futures market and used US dollars to price. In this way, the demand
for US dollars became increasingly important.

The US dollar ascended to the position of the world’s largest reserve currency
and trading currency. However, as the US dollar lost its anchor of gold, its face
value became unstable. The appreciation or depreciation of the US dollar has
42 WENHUA ZONGHENG

caused large price fluctuations in the commodity futures market and had a
significant impact on other importing countries. In this context, western Eu-
ropean countries created the European Monetary System in 1979 in response
to the US dollar crisis. Initially, they chose to float their currencies together
against the US dollar, within a certain limit, a system known as the ‘floating
snake’. However, because the US dollar continued to depreciate, this system
could not solve the problem of inflation imported from the United States. Af-
ter a period of practice, western European countries found that West Germany
had the lowest inflation rate, so the value of the Deutsche Mark was the most
stable. Consequently, the Deutsche Mark was used as the anchor currency
of the European Monetary System, to which the currencies of other west-
ern European countries were pegged. Through this practice, western European
countries introduced anti-inflation factors from West Germany, and inflation
within the European Community countries stabilised.

Today, the United States is facing a similar crisis. Currency cooperation among
the BRICS countries also requires them to find an anchor currency other than
the US dollar. Together, the BRICS countries possess the world’s largest re-
source and energy reserves and the most extensive manufacturing capabilities.
The exchange of industrial production and resources can be realised through
a non-US dollar settlement system. As long as the BRICS countries estab-
lish a non-US dollar settlement system, their economic development will be
free from the negative impact of the US dollar’s fluctuations. However, the
currencies of most BRICS members are still, more or less, pegged to the US
dollar, and their exchange rates are also unstable. If the BRICS countries want
to engage in currency cooperation, the unstable exchange rates between their
currencies will be a major obstacle to overcome. Will the BRICS countries
choose the RMB as their anchor currency? As the inflation rates in the United
States and Europe are already high, their central banks constantly raise inter-
est rates to curb inflation, but the effect is not ideal. By contrast, in China, the
inflation rate has been very stable and low for quite a long time, and people
instead speak of the threat of deflation. Therefore, as a currency, the purchasing
power of the RMB is guaranteed, especially due to China’s strong manufactur-
ing capabilities, which may meet the demand for a wider range of industrial
manufactured products.
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 43

The BRICS countries are representatives of the collective rise of the Global
South. If the BRICS countries can successfully carry out monetary coopera-
tion and overcome the constraints of the US dollar, more and more Global
South countries will participate in this monetary cooperation mechanism in
the future. The global financial system will be transformed, constituting an
important aspect of the ‘great changes unseen in a century’.
44 WENHUA ZONGHENG
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 45

China’s Foreign Exchange

Reserves: Past and Present
Security Challenges

‘China’s Foreign Exchange Reserves: Past

and Present Security Challenges’ (中国外
汇储备的前世今生和当前面临的安
全挑战) was originally published in Chi-
na Reform (中国改革), issue no. 4 ( July
2022).

On 28 February 2022, the United States

and its allies announced the freezing of
Yu Yongding (余永定) is a
member of the Chinese Academy $300 billion in foreign exchange reserves
of Social Sciences. He has served of the Central Bank of the Russian Fed-
as a member of the Advisory eration. At that time, China’s foreign
Committee of National Planning
of the National Development
exchange reserves totalled roughly $3.3
and Reform Commission of the trillion, including more than $1 trillion
People’s Republic of China since in US Treasury bonds.1 The US’ weap-
2004. He has also served on the
Monetary Policy Committee of
onisation of foreign exchange reserves
the People’s Bank of China, the has forced China to re-examine the
Advisory Committee of Foreign safety of its foreign exchange reserves
Policy of the Ministry of Foreign and overseas assets.
Affairs of the PRC, and the For-
eign Affairs Committee of the
Chinese People’s Political Con-
sultative Conference. His main ¹ See ‘2021 Annual Report’ (Beijing: State Administration
research areas are macroeconom- of Foreign Exchange of the People’s Republic of China),
ics, international finance, and the https://www.safe.gov.cn/en/2020/1221/2163.html; ‘Ma-
jor Foreign Holders of Treasury Securities’ (Washington,
world economy.
DC: US Department of the Treasury, 15 March 2023),
https://ticdata.treasury.gov/Publish/mfh.txt.   
46 WENHUA ZONGHENG

The security of China’s foreign exchange reserves is not only an international

financial issue but also a geopolitical and asset management issue. What spe-
cific measures should China take to ensure the security of its foreign reserves?
To completely answer this question is beyond this author’s ability. Rather, this
article only attempts to put forward a rough outline of the origin of China’s
foreign exchange reserves, the challenges faced in the current period, and how
to remedy the situation from the perspective of international finance.

From the Gold Standard to the Post-Bretton Woods Era

Inter-country debt is repaid through the transfer of certain internationally

accepted means of settlement, such as gold, international reserve currencies,
or special drawing rights (SDRs). International liquidity is the stock of these
means of settlement. Countries that issue international reserve currency (i.e.,
the United States) can provide international liquidity or international reserves
to other countries through the capital account deficit or current account defi-
cit.2 Under the Bretton Woods system, where the US dollar was pegged to
gold, the United States provided international liquidity or international re-
serves for other countries through the capital account deficit. From 1945 to
the beginning of the 1950s, Europe and Japan were in dire need of import-
ing goods from the United States but were unable to obtain enough US dol-
lars through exports and because of the severe global ‘dollar shortage’. In the
1960s, the European and Japanese economies were revitalised, and the balance
of trade improved.

Meanwhile, due to the overheating of its domestic economy and its decline in
international competitiveness, the US experienced a decrease in its goods trade
surplus and an increase in its services trade deficit (including overseas military
spending). At the same time, due to higher interest rates in Europe, US capital
flowed into Europe in large quantities, bypassing controls and forming the

² In international macroeconomics, the balance of payments records all transactions made between entities in
one country with entities in the rest of the world. These transactions consist of imports and exports of goods,
services, capital, and transfer payments such as foreign aid and remittances. A capital account deficit shows that
more money is flowing out of the economy along with an increase in its ownership of foreign assets. The current
account is defined as the sum of the balance of trade (goods and services exports minus imports), net income from
abroad, and net current transfers. A current account deficit occurs when the total value of goods and services a
country imports exceeds the total value of goods and services it exports.   
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 47

European dollar market; the US capital account deficit increased rapidly. From
the perspective of Europe and Japan, while their trade deficits were decreas-
ing, there were still large inflows of US dollars, and so their US dollar foreign
exchange reserves increased rapidly. The ‘dollar shortage’ turned into a ‘dollar
glut’. From the point of view of the US, its trade surplus almost disappeared
(with some countries, the US was already in a deficit), while its capital deficit
increased so much that, to use the terminology of the time, the US interna-
tional balance of payments deteriorated sharply.

The intention behind pegging the US dollar to gold was to reassure dollar-
holders that although the US dollar was a fiat currency printed by the United
States with no inherent value, it could be exchanged for gold at a given rate.
Thus, they could hold US dollars with trust. For the US, under the gold ex-
change standard, the international imbalance of payments resulted in the loss
of US gold reserves. While the gold may have remained in US vaults, it was
no longer owned by the US. Foreign central banks could always convert ex-
cess US dollars into gold, and ship the gold back to their countries. By 1971,
the US held just over $10 billion in gold reserves, compared to the more than
$40 billion and $30 billion held by foreign officials and private individuals,
respectively. Eventually, the United States could no longer afford to keep the
promised exchange rate of $35 per ounce of gold. On 15 August 1971, US
President Richard Nixon announced the closure of the ‘gold window’. The
Bretton Woods system collapsed.

However, the inherent contradiction of using a country’s fiat currency as an

international reserve currency has not disappeared under the post-Bretton
Woods system. As the anchor of the international monetary system, the US
dollar must remain stable. This stability is multidimensional; for example, its
purchasing power should be stable. On the one hand, the US dollar has to play
the role of a global public good and should serve the global interest. On the
other hand, the US dollar is printed by the US government. Whether the real
purchasing power of the US dollar can remain stable depends fundamentally
on the domestic policy of the US government, which has no obligation to sac-
rifice its national interests for the global public interest.

In the post-Bretton Woods era, since the United States is no longer an over-
whelmingly dominant economic power, the contradiction between the US
48 WENHUA ZONGHENG

dollar’s status as a national currency (serving US interests) and its status as

an international reserve currency (serving global interests) manifests itself in
the fact that the US has to provide the world with international liquidity, or
a reserve currency, primarily through current account deficits (trade deficits).
As the world’s gross domestic product (GDP) grows, so does the international
reserve currency required for global trade and financial transactions. The more
reserve currency the US provides to the world, the larger the US trade deficit
must be. To put it another way, the United States provides global reserve cur-
rency through IOUs. The growth of the global economy requires the US to
issue more IOUs, and the more IOUs issued, the more foreign debt the US
holds. However, economists did not expect that despite the US having a huge
net debt, its balance of payments on investment income would be positive. Not
only does the US not have to pay interest, but it also collects a lot of it. The
fundamental reason why the US dollar has remained stable – even though the
US is the world’s largest debtor – is that the rest of the world’s demand for
the US dollar as a reserve currency has also been increasing, which means that
other countries are willing to lend money to the US and are willing to finance
the US trade deficit. In this way, the gap between domestic investment and
savings within the United States is made up by foreign savings, and the pres-
sure of inflation and US dollar depreciation is greatly reduced. If there had not
been a strong demand for US dollar foreign exchange reserves in other coun-
tries while the US was indiscriminately issuing dollars to make up for its lack
of domestic savings, the US dollar would have collapsed long ago.

Since the subprime mortgage crisis in 2008, the United States has implement-
ed extremely expansionary fiscal and monetary policies. The strong demand
for US Treasury bonds and other US assets by foreign governments and inves-
tors has created the necessary external conditions for low inflation and faster
growth in the US for more than ten years. However, the US has accumulated
net foreign liabilities of $14 trillion (2020) and a national debt of $28 trillion
(2021), with ratios to GDP of roughly 67 percent and 122 percent, respec-
tively.3 The situation is only continuing to deteriorate. According to the US
Congressional Budget Office, the US national debt-to-GDP ratio will surpass

³ On US net foreign liabilities, see Gian Maria Milesi-Ferretti, ‘The US Is Increasingly a Net Debtor Nation.
Should We Worry?’, The Brookings Institution, 14 April 2021, https://www.brookings.edu/articles/the-us-is-
increasingly-a-net-debtor-nation-should-we-worry/. On US national debt, see ‘2021 Financial Report of the
United States Government’ (Washington, DC: US Department of the Treasury, February 2022), https://home.
treasury.gov/system/files/136/2021-FRUSG-FINAL-220217.pdf.   
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 49

200 percent by 2051.4 The US government has acknowledged that its fiscal
situation is unsustainable.

No one knows how long investor confidence in the US dollar and US Treas-
uries can be maintained in the face of the country’s worsening debt situation.
No one knows when the market will lose confidence in the US dollar and
it will collapse. But would it not be prudent to factor that possibility into
decision-making?

Implications of the US Freezing Russia’s Foreign Exchange

Reserves

Following the outbreak of the Russia-Ukraine conflict, the United States

froze $300 billion in foreign exchange reserves of the Russian Central Bank
within 72 hours. This has seriously undermined the international credibility of
the US and shaken the credit foundation of the Western-dominated interna-
tional financial system. Which country can be sure that the US will not freeze
its foreign exchange reserves similarly in the future? The US’ weaponisation
of foreign exchange reserves has exceeded the worst estimates of economists
about the security of China’s foreign exchange reserves. The value of China’s
foreign exchange reserves will not only suffer losses due to US inflation, dol-
lar depreciation, and falling treasury bond prices or defaults but they may be
wiped out instantly for geopolitical reasons.

Will the United States take such extreme actions against China’s foreign re-
serves? As early as 2013, Martin Wolf, chief economics commentator for the
Financial Times, wrote that the US could well freeze China’s foreign exchange
assets in the event of a conflict.5 While both sides would suffer heavy losses,
China’s losses would be even heavier. One question that China may soon face
is whether it should join the embargo on Russian oil and gas and compre-
hensive financial sanctions against Russia. So far, the US has not imposed a
comprehensive oil and gas embargo on Russia, and China and India are still

⁴ ‘The 2021 Long-Term Budget Outlook’ (Washington, DC: US Congressional Budget Office, March 2021),
https://www.cbo.gov/publication/57038.   
⁵ Martin Wolf, ‘China Must Not Copy the Kaiser’s Errors’, Financial Times, 3 December 2013, https://www.
ft.com/content/672d7028-5b83-11e3-a2ba-00144feabdc0.   
50 WENHUA ZONGHENG

allowed to buy Russian oil and gas. However, once the US believes that Eu-
rope can be rid of its dependence on Russian oil and gas, it may then point its
finger at China and India. China’s continued purchase of Russian oil and gas
will likely become a reason for the US to act against China’s foreign reserves
or impose sanctions on Chinese financial institutions.

China’s Massive Foreign Exchange Reserves and

Countermeasures

China has accumulated its massive foreign exchange reserves over a long pe-
riod of time, through ‘double surpluses’ – current account surplus and capital
account surplus. By any standard, China’s holdings of $3.3 trillion in foreign
exchange reserves (excluding Hong Kong’s $496.8 billion and Taiwan’s $548.4
billion) far exceed the internationally recognised reserve adequacy require-
ment; the second, third, and fourth largest foreign exchange reserve holders
in the world are Japan, with $1.3 trillion; Switzerland, with $1 trillion; and
India, with $569.9 billion.6 There are only three countries in the world with
foreign exchange reserves of more than one trillion US dollars (China, Japan,
and Switzerland), and China’s foreign exchange reserves are nearly three times
that of Japan, which is ranked second.

Since the rate of return on foreign exchange reserves is extremely low, if the
proportion of foreign exchange reserves in overseas assets is too high, the over-
all rate of return on overseas assets will inevitably be too low. Of China’s $9
trillion in overseas assets, reserve assets account for 37 percent of the total;
of these reserve assets, US Treasury bills account for 32 percent.7 It should
be noted that, to improve the rate of return on foreign exchange reserves, the
State Administration of Foreign Exchange, an administrative body of the Peo-
ple’s Bank of China, and other relevant agencies have taken into account not
only safety and liquidity but also the rate of return in their asset allocation.
In addition to treasury bills of the United States and other countries, China’s

⁶ Foreign exchange reserves as of the end of 2021. Sources: State Administration of Foreign Exchange of the Peo-
ples Republic of China, Hong Kong Monetary Authority, Taiwan’s central bank, Japanese Ministry of Finance,
Swiss National Bank, Reserve Bank of India.   
⁷ ‘2021 Annual Report’ (Beijing: State Administration of Foreign Exchange of the People’s Republic of China),
https://www.safe.gov.cn/en/2020/1221/2163.html   
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 51

reserve assets also include bonds of international organisations, local govern-

ment bonds, private equity investments, and policy investments such as the
Belt and Road Initiative (BRI). These efforts should be productive. However,
in any case, because of the safety and liquidity requirements of foreign re-
serves, an overproportion of foreign reserves in overseas assets will inevitably
lead to lower income from overseas assets. Not only that, a large proportion
of China’s foreign exchange reserves is ‘borrowed’ through the introduction of
foreign capital rather than ‘earned’ through the trade surplus. Compared with
the investment income of foreign reserves, the debt cost of ‘borrowed’ foreign
exchange reserves is extremely high. A 2008 survey conducted by the World
Bank office in Beijing showed that the investment income of US enterprises
in China is 33 percent compared with 22 percent for foreign enterprises in
general. At the same time, the investment return on US Treasury bills was less
than 3 percent. This situation is also one of the reasons for China’s negative
investment returns despite its $2 trillion in net overseas assets. China’s balance
of payments and overseas investment position is in stark contrast to that of the
United States. As mentioned, the latter will have nearly $200 billion in invest-
ment income in 2021 despite being a $15 trillion net debtor. Looking around
the world, Argentina and Russia are the only countries in the same boat as
China.

In the early days after China’s opening up, the shortage of foreign exchange
was the main bottleneck to the country’s growth. Although there was partial-
ity and overreaction, it was ultimately the right step for China to develop pro-
cessing trade vigorously to earn foreign exchange, actively introducing foreign
direct investment and drastically devaluing the Chinese renminbi (RMB) in
one go. However, after the Asian financial turmoil in 2003, China, due to ‘ap-
preciation phobia’, delayed the slight appreciation of the RMB until 2005. The
consequence of this is that, on the one hand, China’s trade surplus increased
sharply, and, on the other hand, the domestic asset bubble and the strong ex-
pectation of RMB appreciation led to a large inflow of ‘hot money’. China’s
capital account surplus once exceeded the trade surplus and became the pri-
mary source of new foreign exchange reserves. It is fair to say that China’s fail-
ure to let the RMB appreciate in time and its lack of exchange rate flexibility
were the conditions that led to the country’s excessive accumulation of foreign
exchange reserves.
52 WENHUA ZONGHENG

The principal purposes for restructuring China’s overseas asset-liability struc-

ture and balance of payments structure should be twofold. First, to improve
the structure of China’s overseas assets-liabilities and to increase the return
on its net overseas assets. To this end, China should reduce the share of for-
eign exchange reserves in its overseas assets. Second, to improve the safety of
China’s overseas assets, especially its foreign exchange reserves. Under current
conditions, China should reduce its stock of foreign exchange reserves to at
least the internationally recognised level of foreign exchange reserve adequacy.
How much foreign exchange reserves should a country hold? In general, this
depends on the size of the country’s imports (or exports), the size of short-
term foreign debt, the size of other securities liabilities, and the broader money
supply (M2).8 At the same time, it is also necessary to consider the country’s
exchange rate regime and capital controls. For example, if the country has a
floating exchange rate and capital controls, the country’s foreign exchange re-
serve adequacy ratio can be significantly reduced.

The possibility of the United States freezing and seizing China’s overseas as-
sets cannot be ruled out. However, the greater likelihood is that the US will act
against China by using its Specially Designated Nationals (SDN) list to target
individuals and entities with sanctions (akin to the now defunct Part 561 List
sanctions against Iran). To deal with this possibility, China needs to improve
its financial infrastructure. For its existing stock of foreign exchange reserves,
measures that China should consider include:

1. Increasing holdings of other forms of assets while reducing US Treasuries

holdings. In the past, arguments have been made in favour of currency diver-
sification of China’s foreign exchange reserves (towards the Euro and Japanese
yen) due to concerns about the depreciation of the US dollar. However, under
the current geopolitical conditions, such diversification may not be sensible.

⁸ Several measures are used to gauge the money supply (i.e., the total amount of money in circulation) in an econ-
omy. The World Bank defines these measures as follows: ‘The narrowest, M1, encompasses currency held by the
public and demand deposits with banks. M2 includes M1 plus time and savings deposits with banks that require
prior notice for withdrawal. M3 includes M2 as well as various money market instruments, such as certificates
of deposit issued by banks, bank deposits denominated in foreign currency, and deposits with financial institu-
tions other than banks.’ See ‘Metadata Glossary’, The World Bank, accessed 20 March 2024, https://databank.
worldbank.org/metadataglossary/world-development-indicators/series/FM.LBL.BMNY.ZG.   
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 53

2. Accelerating the construction of financial infrastructure – such as set-

tlement, clearing, and messaging systems – that is independent of the US.
Make full use of China’s technological reserves and strength in the field of
digital technology to improve the cross-border payment system that adapts to
the new trend of digital trade.

3. Reducing US Treasury bills holdings in accordance with market rules. In

recent years, it has been reported that central banks in many countries have
been selling US Treasury bills. Such trading activities are purely commercial,
so the US should have no grounds to object.

What Role Can RMB Internationalisation Play?

As the international geopolitical situation has deteriorated, RMB internation-

alisation has once again become a hot topic. In 2008, the US subprime mort-
gage crisis erupted, and the bankruptcy of Fannie Mae and Freddie Mac, which
held large amounts of US Treasury and government agency debt, caused great
anxiety in the Chinese government. In 2009, Zhou Xiaochuan, then governor
of the People’s Bank of China (PBOC), the country’s central bank, proposed
that SDRs replace the US dollar as the international reserve currency. How-
ever, this proposal was aborted due to the opposition of the United States. So,
China found another way to reduce the risk of its overseas assets: internation-
alising the RMB. However, the process of RMB internationalisation would
be hindered as the expectation of RMB appreciation turned to depreciation.
For some time after 2015, China had to tighten capital controls due to serious
capital outflows and flight.

Yi Gang, who succeeded Zhou as governor of the PBOC, stressed on several

occasions that ‘RMB internationalisation should be market-driven, and the
central bank will not take the initiative to promote it’.9 Governor Yi’s assertion
is correct and in line with the historical experience of RMB internationalisa-
tion to date. In fact, from 2009 to 2014, detailed and thorough discussions were
held on the benefits and costs of RMB internationalisation and the roadmap

⁹ ‘人民银行副行长易纲: 人民币国际化应由市场驱动’ [Yi Gang, Vice Governor of the People’s Bank of Chi-
na: RMB Internationalisation Should Be Driven by the Market], The State Council of the People’s Republic of
China, 14 October 2012, https://www.gov.cn/jrzg/2012-10/14/content_2242995.htm.   
54 WENHUA ZONGHENG

for China to follow in both domestic and overseas economic spheres. These
ideas have since been tested in practice. For example, when China pushed for
RMB import settlement in the past, the US dollar was replaced by the RMB
to pay for imports when China had a large current account surplus and, as a re-
sult, China’s foreign exchange reserves in US dollars increased rather than de-
creased. As another example, it was hoped that non-residents would increase
their holdings of RMB deposits and RMB treasury bonds in large quantities,
but after the expectation of RMB appreciation disappeared in 2014, the inter-
est of non-residents in holding RMB deposits and other RMB assets largely
disappeared as well. Experience tells us that while RMB internationalisation
is a worthy cause, the process must be market-driven. China should not priori-
tise short-term benefits or instant gratification, nor should it try to help young
shoots grow by dragging them up.

Whenever possible, the buyer’s or seller’s advantage should be used to advance

RMB-denominated pricing and settlement. For example, China is the larg-
est buyer of many commodities, and it would undoubtedly benefit China if
these commodities were denominated in RMB. Driven by the market, the
internationalisation of the RMB has indeed made solid, if not spectacular, pro-
gress. On the whole, the RMB’s emergence as an international currency, and
in particular an international reserve currency, could bring enormous benefits
to China.

In general, however, RMB internationalisation should not be given priority

over commercial considerations. For example, when a Chinese investor buys
a foreign bond in the international capital market, the currency in which the
bond is denominated and settled is determined by the market. For Chinese in-
vestors, if the RMB is on a long-term appreciation path, it is preferable for the
bond to be denominated in RMB rather than US dollars; meanwhile, where a
Chinese company is in a debtor position, it is preferable for the bond to be de-
nominated and settled in a depreciating currency. China also needs to promote
the internationalisation of its capital markets. However, the purpose of such
promotion, especially the bond market, is not to internationalise the RMB but
to improve the efficiency of China’s financial resource allocation. The market
knows best what is going on at the micro level. The choice of currency in trade
and financial transactions should be left to the discretion of enterprises and
financial institutions. As China’s economic strength grows stronger and its fi-
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 55

nancial markets become more sophisticated, the RMB will naturally be chosen
more and more as the international currency of denomination and settlement.

The highest level of RMB internationalisation is for the RMB to become a

reserve currency for other countries. The RMB can be supplied to other coun-
tries through current account deficits and capital account surpluses; China
pays for its trade deficit in RMB, and the central bank of the country with a
trade surplus acquires and holds the RMB in the foreign exchange market, us-
ing the RMB to buy Chinese treasury bonds or certain safe and liquid Chinese
bonds. In this way, the RMB becomes the surplus country’s reserve currency.
China, in turn, can use the RMB’s status as an international reserve currency
and a credit note to gain access to resources.

China can also promote the RMB as a reserve currency through capital ex-
ports. Generally speaking, when China provides RMB to other countries
through capital export, the capital-importing country will use these RMB to
import goods from China and the RMB will flow back to China. The capital-
importing country will record a Chinese trade deficit and an equivalent capital
account surplus on its balance of payments statement, but its foreign exchange
reserves will not increase as a result. If the country does not use the RMB to
purchase Chinese goods, the RMB may flow out of the country through the
capital account, or it may be sold to the country’s central bank and used to
purchase Chinese treasury bonds or other safe and liquid financial assets, thus
forming the country’s foreign exchange reserves.

However, for the recipient countries of Chinese capital exports, these RMB
foreign exchange reserves would be borrowed from China, not earned through
export surpluses. Importing capital from China and not using it to buy Chi-
nese goods and services, but rather to hold short-term Chinese capital with
low returns may be a misallocation of resources. As a result, the recipients of
Chinese capital exports will minimise this portion of RMB foreign exchange
reserves. In other words, while China may provide other countries with RMB
through capital exports, the willingness of other countries to convert the cor-
responding RMB into Chinese short-term bonds or treasury bonds (if the
latter are available) – thereby forming these countries RMB foreign exchange
reserves – may be limited.
56 WENHUA ZONGHENG

In short, for the RMB to become an international reserve currency, China

must fulfil a series of preconditions, including establishing a sound capital
market (especially a deep and highly liquid treasury bond market), a flexible
exchange rate regime, free cross-border capital flows, and long-term credit in
the market. In short, China must overcome the so-called ‘original sin’ in inter-
national finance and be able to issue treasury bonds internationally in RMB.10
Otherwise, it will be difficult for the RMB to become an international reserve
currency and RMB internationalisation will remain incomplete.

Can RMB internationalisation enhance the security of China’s foreign ex-

change reserves? If this question is considered in the context of a complex
global economic system, the answer should be yes. However, in the short term
and in terms of direct impact, even if China’s foreign exchange reserves con-
sisted entirely of RMB assets, their security would not change substantially.
There are more than $1 trillion worth of US Treasury bills among China’s
foreign exchange reserves. If the United States does not intend to repay the
principal and interest according to the original agreement, what can China do?
Nothing. Suppose the US Treasury issues 7 trillion RMB in treasury bonds
and China owns 7 trillion RMB instead of $1 trillion in foreign exchange
reserves by buying this US-issued RMB bond; if the US does not intend to
make debt service payments on US Treasuries that are agreed to be denomi-
nated in RMB, the dilemma that China faces will remain the same as if the
assets are denominated in US dollars. Because the key to the problem does not
lie in the currency that China’s foreign exchange reserves are denominated and
settled in, but in whether China owes the United States money or vice versa.
Regardless of their denomination and settlement, China’s foreign exchange
reserves are US debt to China. It is money that the US owes China. Thus, the
safety of China’s foreign exchange reserves depends on whether the US will
honour its debt-servicing commitments and, should it not, whether China
can compel the US to do so. If China cannot ensure that the US will not
renege, it has no choice but to gradually reduce its foreign exchange reserves.
Of course, denominating and settling certain transactions (e.g., imports) in
RMB can lead to a reduction in foreign exchange reserves, thus strengthening

¹⁰ In international financial literature, ‘original sin’ is a term that refers to ‘a situation in which the domestic cur-
rency cannot be used to borrow abroad or to borrow long term, even domestically’. See Barry Eichengreen and
Ricardo Hausmann, ‘Exchange Rates and Financial Fragility’, NBER Working Paper 7418 (Cambridge, MA:
National Bureau of Economic Research, November 1999), https://www.nber.org/system/files/working_papers/
w7418/w7418.pdf.  
 THE BRICS AND DE-DOLLARISATION: OPPORTUNITIES AND CHALLENGES 57

the security of China’s foreign reserves in an indirect sense. It is interesting to

note that in early December 1950, when the US announced a severe ‘blockade’
and ‘embargo’ against China, China endeavoured to ‘snatch’ and ‘buy’ goods
from Western countries. By the time the United Nations passed the embargo
resolution against China in 1951, China had used up all its foreign exchange
savings.

In short, while RMB internationalisation is a goal worth pursuing, it is a long-

term process; distant water will not quench immediate thirst. In the face of
geopolitical challenges, RMB internationalisation will also have a limited ef-
fect in protecting China’s existing overseas assets.

What China can now do to address the challenges with its foreign exchange
reserves is to ‘mend the fold’; in other words, it is better to act late than never.
As one of China’s greatest poets, Tao Yuanming (365–427 CE), wrote, ‘Know-
ing that what I did in the past cannot be redressed, I can still retrieve my
mistakes in the future’. The key is to properly understand and implement the
strategic policy of fostering a new development paradigm with domestic circu-
lation as the foundation and domestic and international circulation reinforcing
each other. Doing so will accelerate the transformation of China’s develop-
ment strategy, realise the turn towards domestic circulation, and consolidate
domestic demand as the driving force of economic growth.

The British economist John Maynard Keynes once said, ‘If you owe your bank
a hundred pounds, you have a problem. But if you owe a million, it has’. In
the current perilous geopolitical environment, if a country cannot safeguard
its rights as a creditor, it should strive to avoid becoming a creditor as much
as possible. In the face of potential US financial sanctions in the near future,
China’s decision-making authorities must analyse various possible scenarios
and develop preventive and responsive countermeasures.
58 WENHUA ZONGHENG

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Eichengreen, Barry, and Ricardo Hausmann. ‘Exchange Rates and Financial Fragility’. NBER Work-
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This publication is issued under a Creative Commons Attribution-NonCommercial

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WENHUA ZONGHENG (文化纵横) is a leading
journal of contemporary political and cultural
thought in China. Founded in 2008, the journal
publishes issues every two months, featuring articles
by a wide array of intellectuals across the country
and building a platform for discussion of different
ideological positions and values in China’s intellectual
community. The publication is an important reference
for debates and developments in Chinese thought,
on matters ranging from China’s ancient history and
traditional culture to its current socialist practices
and innovations, from the important cultural trends
in contemporary Chinese social life to Chinese views
and analyses of the world today. Tricontinental:
Institute for Social Research and Dongsheng News
have partnered with Wenhua Zongheng to publish an
international edition of the journal, releasing multiple
issues per year featuring a selection of articles that
hold particular relevance for the Global South.

In Chinese, the word ‘Wenhua’ (文化) means ‘culture’

as well as ‘civilization’, while ‘Zongheng’ (纵横) literally
means ‘verticals and horizontals’, but also alludes
to the strategists who helped to first unify of China,
roughly 2,000 years ago through diplomacy and
alliances. It is impossible to translate the journal’s title
into English while retaining its historical meaning and
significance, therefore, we have chosen to keep the
pinyin romanisation of the title to remind our readers:
China has a complex history and culture that is
challenging to translate and navigate, and this project
seeks to bridge this understanding.