https://asiatimes.com/2022/06/yuan-ruble-trade-boom-a-wakeup-call-for-biden/
Yuan-ruble trade boom a wakeup call for Biden
Yuan-ruble trade volumes have surged 1,067% since the Ukraine war, putting new pressure on the dollar’s reserve currency status
by William Pesek June 2, 2022
Ruble-yuan trading is up over 1,000% since Russia's invasion of Ukraine. Image: Facebook
TOKYO – As JPMorgan CEO Jamie Dimon warns of a coming economic “hurricane” in the US, global investors are simultaneously observing a potential earthquake, too.
The shakes are coming from efforts in Moscow and Beijing to join forces against the dollar’s dominance in trade and finance.
News this week that monthly ruble-yuan trading volumes skyrocketed 1,067% to almost US$4 billion since the start of Russia’s invasion of Ukraine pushes to the center stage the idea of a multipolar world many pundits claimed wouldn’t emerge.
Sobriety is needed here, of course. When Twitter co-founder Jack Dorsey claims the dollar has lost its “global reserve currency status,” the top-line data don’t back him up.
The dollar still accounts for nearly 60% of global currency reserves, while the euro makes up 20%, the yen roughly 5.8%, the yuan just under 3% and the cryptocurrencies that Dorsey is hawking these days essentially zero.
The spike in Russia-China handholding coincides with a spike in Vladimir Putin’s ruble to five-year highs against Xi Jinping’s yuan. And with Putin doubling down on his Ukraine war, and US-China relations hanging in the balance, some think the trend could have legs.
“The current crisis is unlikely to lead to anything other than a further tightening of Sino-Russian bilateral relations,” says Bjorn Alexander Duben, an associate at LSE IDEAS, a London School of Economics think tank. “Xi’s China will prop up Russia and try to ensure that Putin’s power is preserved.”
In the short run, the intrigue surrounding this dynamic is more geopolitical than financial. Increasing bilateral trade between two US rivals fed up with dollar hegemony is watering down the effects of US sanctions.
The longer-term questions, though, warrant far more attention than they’re getting. How, for starters, would a modern global economy essentially built around one currency respond to a sudden shift to others?
Caveats abound, of course. One is a dearth of alternatives ready to supplant the dollar. The yuan isn’t fully convertible at a moment when President Xi is making Asia’s biggest economy less transparent.
Xi’s “zero-Covid” absolutism is hitting regional growth prospects. And holding rubles? Many might prefer even Bitcoin over the currency of a leader steadily morphing Russia’s economy into North Korea 2.0.
And is Putin, in his economic depression, thinking through how this might turn out for the Russian state? As Duben puts it, Russia is the much weaker partner, likely relegating it “from a great power peer to a client of Beijing.”
The euro, meantime, is its own can of worms, fiscally and politically. The yen’s potential is marred by the fact roughly 90% of outstanding Japanese government bonds are held domestically, mostly by the central bank.
Even so, the powers that be in Washington have made an art form out of neglecting the nation’s reserve currency status.
The most recent episode of this rot arguably started with the 2008 subprime crisis. The fact Wall Street nearly collapsed was outdone by the failure by Congress to avoid the next stumble — the hurricane of which Dimon warns.
Then came Republican Party firebrands in 2011 playing politics with the US debt ceiling, raising the specter of a default. The brawl saw Standard & Poor’s yank away Washington’s AAA credit rating – and China questioning its ability to trust US officials with more than $1 trillion of state wealth.
In 2017, the-president Donald Trump signed a $1.8 trillion tax cut that did zero to catalyze new investments in technology or productivity-enhancing restructuring. What it did do was hasten Washington’s national debt trajectory to, and now well past, the $30 trillion mark.
Trump’s chaotic trade war – which did zero to narrow its goods and services deficit – lost the US the trust of key allies. And Trump’s bullying of the Federal Reserve – pressuring the most powerful central bank to ease even when growth was robust – cost the dollar more of its hard-won credibility.
Nor did a truly disastrous non-response to the Covid-19 crisis make Washington many friends. It further damaged the US balance sheet.
Enter Joe Biden in January 2021 amid blazing crises on all sides. Not least of which was the January 6, 2021 insurrection that attempted to keep the election-losing Trump clan in the White House.
And, of course, there’s the inflation crisis that his government made worse with massive fiscal jolts that weren’t paired with steps to boost tech investment and productivity.
This led to a perfect inflation storm of sorts: Trump’s tariffs; global supply-chain chaos; a burst of pent-up demand as Covid-traumatized economies reopened; massive new stimulus; and a timid Fed too slow to tighten.
Now, it may be too late for the Fed to regain control. Had Chairman Jerome Powell hiked interest rates once or twice in late 2021, speculators might not have driven stocks into the stratosphere. Companies racing to raise prices might’ve thought twice. Global investors might’ve taken comfort that the Powell Fed is on the case.
To be sure, much of the reason inflation is at 40-year highs is beyond the Fed’s control. But the Fed would’ve calmed nerves by yanking the proverbial punchbowl away. And Biden’s team could be rolling out a more muscular response as the surging cost of oil and food and baby formula shortages further dent his low approval ratings.
Here, US Treasury Secretary Janet Yellen’s recent dear-in-the-headlights interviews are unhelpful. If Biden’s White House – or his Democratic Party – has a plan to tame inflation, it’s doing a very poor job articulating it.
Put all these headwinds and missteps since 2008 together and you have a currency trust deficit that China and Russia are exploiting.
“Questions over the USD’s dominance as a reserve currency are not new,” says Rong Ren Goh, portfolio manager at Eastspring Investments. “Over the years, critics have highlighted the US’ exorbitant privilege to be able to fund massive private and public borrowing at attractive interest rates, as well as its extraordinary influence over global financial systems. Yet till now, few currencies have been able to displace the dollar’s reign, although the winds of change may be emerging more strongly.”
Many question, for example, the longer-term fallout from US efforts to freeze hundreds of billions of dollars of Russia’s foreign-exchange reserves.
“For reserve managers who may not embrace the US’ political ideology,” Goh says, “the emergence of the RMB as a credible alternative reserve currency provides a potential source of diversification. China has been incrementally opening up its domestic capital markets to foreign institutional investors since the 2000s.”
Goh adds that China’s alternative payments system, the RMB Cross-border Interbank Payment System, deserves more attention.
Launched in 2015, it aims to increase the use the yuan by offering clearing and settlement services for participants in cross-border yuan payments and trade. In the aftermath of Russian sanctions levied by the US and Europe, the argument for China’s CIPS system could gain traction.
Economist Holger Schmieding at Berenberg Bank notes that Xi senses an opportunity to make progress in his big-picture priority to increase the yuan’s global clout. “China and Putin have a clear interest in working together more closely,” Schmieding argues.
In March, analysts at research firm Rhodium Group argued that Xi favors a “third way somewhere between the binary choice of supporting Russia or refusing to do so.” The in-the-middle path means “quietly maintaining existing channels of economic engagement with Russia while minimizing the exposure of China’s financial institutions to Western sanctions.”
Yet this, too, could be a risky strategy. Strategist Gene Frieda at Pacific Investment Management Company LLC argues that “larger central banks may be more reluctant to hold the yuan due to potential Western sanctions risk and the corresponding need for China to reimpose capital controls on foreigners. The yuan should continue to attract reserve flows from smaller countries that China dominates as a trade partner.”
Schmieding agrees. “China,” he says, “is happy to cause problems for the West and would not mind turning Russia gradually into its pliant junior partner.” Even better if China scores a steady supply of cheap oil, gas and other priorities from a Russian leader running out of friends.
Yet the dollar’s standing in the global pecking order is now Team Biden’s to lose. It’s incumbent upon the US to tackle inflation urgently, get its fiscal house in order and return to the business of investing in future industries. Otherwise, the yuan-ruble partnership and others will leave Washington with a bull market in regret.
Follow William Pesek on Twitter at @WilliamPesek