How Brazil’s Lula added a spring to Xi Jinping’s step
Reducing the dollar’s dominance in global commerce has been a top goal for China
For Xi Jinping, last week was easily among the best the Chinese leader has had in a long while.
First, French President Emmanuel Macron dropped by to talk up the merits of Europe forging a diplomatic path independent of the US. For good measure, Macron gave Beijing the impression Paris isn’t keen on coming to Taiwan’s defense should conflict break out.
Then it was Brazilian President Luiz Inacio Lula da Silva’s turn to make global headlines at Washington’s expense. Lula visited Huawei Technologies, a target of US sanctions. He also entertained Xi’s ceasefire in Ukraine, one Washington has roundly dismissed.
Yet the real tailwind Lula brought to town relates to Xi’s long-held desire to reduce the role of the US dollar.
While visiting Shanghai, Lula urged fellow BRICS economies – Brazil, Russia, India, China and South Africa – to accelerate efforts to supplant the dollar in global trade and finance. He said the BRICS-created New Development Bank should take the lead in wrestling financial power away from Washington.
“Why can’t an institution like the BRICS Bank have a currency to finance trade relations between Brazil and China, between Brazil and all the other BRICS countries?” Lula asked. “Who decided that the dollar was the [trade] currency after the end of gold parity?”
It was music to Xi’s ears. Reducing the dollar’s dominance in global commerce has been a top goal since 2012, when Xi first rose to power. Since then, China has made steady inroads toward increasing the yuan’s use in transactions, payments and bond issuances – including Russian and Saudi Arabian oil sales.
Last month, Beijing and Brasilia tightened cooperation in settling foreign trade in yuan or Brazilian reais. In doing so, the biggest economies in Asia and Latin America will greatly reduce costs by eliminating a third currency.
In Shanghai, Lula’s Finance Minister Fernando Haddad highlighted the increased use of local currencies in bilateral trade instruments like credit receipts. The emphasis now, Haddad said, is to phase out the use of a third currency via new trade mechanisms and mediums.
“The advantage is to avoid the straitjacket imposed by necessarily having trade operations settled in a currency of a country not involved in the transaction,” he told reporters.
Lula’s boost to Xi’s “Global South” ambitions shouldn’t be played down. In his third term, Xi is putting greater emphasis on morphing the Global South, or developing countries in the regions from Latin America to Africa to Asia to Oceania, into a bigger economic and diplomatic force.
For Xi, rising tensions with the West – the Global North – means “trade diversification is a critical component of this effort,” says analyst Lily McElwee at the Center for Strategic and International Studies (CSIS).
The visit by Brazil’s leader paid other dividends. Lula signed on to wording favored by both Moscow and Beijing that, on Ukraine, negotiation is “the only viable way out of the crisis,” while steering clear of the words “invasion” or “war.”
Pushback on Washington
But the real deliverable way is having the leader of Latin America’s superpower thumb his nose at US President Joe Biden’s economy – and at a pivotal moment as Washington turns the screws on Beijing on trade and access to vital technology.
The Brazilian president met with Biden in February. As such, “Lula’s interest in closer relations with China is not an indicator of diminished interest in relations with the US and Western allies, but it introduces greater complexities,” says analyst Anna Ashton at Eurasia Group.
Here, though, Lula’s support for a dollar alternative could be a particularly powerful booster for Xi. Even former Goldman Sachs economist Jim O’Neill, who coined the initial BRIC acronym in 2001, thinks the dollar’s influence grew too big for Washington’s britches.
“The US dollar plays a far too dominant role in global finance,” O’Neill says. “Whenever the Federal Reserve Board has embarked on periods of monetary tightening, or the opposite, loosening, the consequences on the value of the dollar and the knock-on effects have been dramatic.”
Eight years after O’Neill’s BRIC concept caught the developing world’s attention, Brazil, Russia, India and China moved to institutionalize the grouping. In 2009, BRIC infrastructure was established including holding annual summit meetings. In 2010, the bloc added South Africa to become the BRICS.
Today, O’Neill argues that BRICS broadening its base to include other “emerging nations with persistent surpluses,” could create a “a globally fairer, multi-currency global system” to equalize economic power dynamics.
Hence, the power – and the timing – of Lula’s buy-in. During his earlier stint as Brazilian leader, Lula was at that maiden BRIC summit in Yekaterinburg, Russia. That was back when Xi’s predecessor Hu Jintao was leading the Communist Party of China (CPC).
The 2009 summit took place amid financial fallout from Wall Street’s implosion nine months earlier. In Yekaterinburg, the BRIC nations mulled how officials in Beijing, Brasilia, Moscow and New Delhi could better cooperate on economic and shared priorities in global affairs.
There, leaders agreed on the need for a new global reserve currency offering “diverse, stable and predictable” qualities that the dollar was exhibiting less and less.
That statement briefly sent the dollar downward versus major currencies. At the time, then-Russian president Dmitry Medvedev said “the BRIC summit [process] must create the conditions for a fairer world order.”
In Yekaterinburg 14 years ago, Medvedev said the “existing set of reserve currencies, including the US dollar, have failed to perform their functions. We will not do without additional reserve currencies.”
He spoke of a new supranational reserve currency at a moment when the International Monetary Fund’s “special drawing rights” (SDR) program was gained a bigger role in financial circles.
In the weeks before Yekaterinburg, Moscow called for an expansion of the SDR universe, one China would join in 2016. Back in 2009, Roberto Mangabeira Unger, then Brazil’s minister for strategic affairs, said “everyone is concerned about the delicacy of this issue. No one wants to say things or do things that would increase volatility in the circumstance of the crisis.”
Shifting power centers
Much has changed since then. Lula has wrested power back from Jair Bolsonaro’s chaotic and isolationist era of government. Vladimir Putin is officially back in control of the Russian state and more anti-Western than ever.
Hindu nationalist Narendra Modi’s reign in India has New Delhi cozying up to Moscow for cheap oil. And Xi, after a decade in power, is now putting expanding China’s international role at the top of his priorities list.
McElwee of CSIS notes that “in this push, enhanced trade with Russia is useful,” as Putin “increasingly relies on China for advanced technology it now has very limited capacity to officially purchase from Western nations, such as semiconductors and telecommunications equipment even while remaining only one part of a longer-term Chinese export diversification push that also includes many countries in the Global South.”
Likewise, McElwee explains, “as China’s international environment sours, Beijing increasingly seeks to enhance self-reliance in core technologies. Just weeks ago in Beijing, for example, policymakers signaled the centrality of this priority by launching a new CPC commission designed to enhance China’s research and innovation capabilities.”
This “goal may be getting a boost for Moscow’s pariah status,” McElwee says. “While greater access to Russia’s top scientific faculties and research and development facilities has long been a goal, recent joint ventures suggest Beijing is leveraging its close partnership with Moscow to improve the quality of China’s science and technology education ecosystem.”
As Xi is increasing the independence of Chinese supply chains from Biden’s sanctions, Lula’s return to Brazilian power is adding momentum to Beijing’s bigger-picture replace-the-dollar ambitions.
Greater cooperation proved difficult during Bolsonaro’s 2019-2022 presidency, during which right-wing politicians accused Chinese companies of “buying” Brazil. Now Lula, who returned to office in January, is working on at least 20 bilateral projects with Beijing in areas from agriculture to the environment to education to technology and myriad business deals.
Among the business narratives Lula was playing up last week is Chinese manufacturer BYD’s plans to take over a former Ford factory in northeastern Brazil. In October, BYD signed a letter of intent with the Bahia state government to invest more than US$600 million in electric-vehicle production, generating roughly 1,200 jobs.
Devising the logistics and mechanics of a BRICS currency is infinitely easier said than done. Is China, which is reluctant even to allow the yuan to be fully convertible, ready to join a giant currency bloc?
Of course, the short-term outlook for the dollar is imperiled by recession fears that have only been exacerbated by the collapse of Silicon Valley Bank and peers.
“We expect the US dollar to weaken as the US growth and interest-rate premium relative to the rest of the world erodes in the coming months,” notes Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management.
The dollar has much bigger problems, though. They include the US Federal Reserveunnerving world markets with aggressive interest-rate increases, Washington’s debt careering toward $32 trillion and worries the Biden White House is overplaying its hand on sanctions versus China and Russia.
And now, Brazil’s Lula is helping Xi’s quest to grow the influence of the Global South and remind traders that time isn’t on the dollar’s side.
A great week indeed for Xi’s broader ambitions.