Brazil-China agreement to circumvent the dollar is a good move – 07/04/2023 – Igor Patrick

The announcement was supposed to be one of the highlights of president Lula’s visit to Beijing, but it made noise even with the postponement of the trip: Brazil and China closed an agreement to carry out commercial exchanges without going through the dollar.

The feat will be made possible by an arrangement put together by the monetary authorities of both countries, using the ICBC bank as a clearing house — that is, a financial institution with liquidity in the renminbi capable of converting directly into the real without using the American currency in the process.

The news made waves on the internet. This week alone, I went through four or five influencers on TikTok using the deal as an example of the collapse of the dollar (and the United States for that matter), some enthusiastic reviews about “the return of the Brics” and grumblings from American politicians and analysts, who used the case as an example of how China is working to consolidate its hegemony outside the containment attempts promoted by Washington.

There is a high degree of exaggeration in all this, of course, but in essence, Brazil is one more piece in the ambitious (and still immature) Chinese project to internationalize its currency. The motivation stems from an anxiety shared by high-ranking bureaucrats in the Communist Party and the People’s Bank of China that dates back well before the estrangement from Washington and dates back to 2008.

The crisis that year generated a global liquidity problem for the US currency. With little dollar circulating, international trade was paralyzed and entire ports had to stop operations because it was not possible to pay for goods.

Fearful about the effects of future instabilities on the American macroeconomy for its exports, China even suggested replacing the dollar with an artificial monetary unit that would be managed by the International Monetary Fund. Without support, however, he began to design alternatives to avoid dependence on the United States.

Ambition was included as a central part of the 12th Five-Year Plan (a kind of roadmap used to mark out the Chinese regime’s goals every five years) and has been promoted mainly through bilateral agreements.

Beijing offers, for example, more attractive financing options for Belt and Road Initiative projects using the renminbi and has already made occasional use of the currency to circumvent US sanctions on third countries. In the medium term, the objective is to integrate economies relevant to its strategic objectives, bringing them into its sphere of influence.

Internationalizing the renminbi is also insurance against sanctions in the future. As every transaction that uses the dollar at some point goes through intermediary banks in the US, Washington has increasingly used its power to block access by groups, companies and even entire countries to transactions with its currency. In recent years, countries like Iran, Venezuela and Russia have been impacted by these blockades. The Chinese know they could be next and want to minimize the impact.

Despite this, contrary to what impassioned analyzes would have you believe, the road is still long. To protect the domestic economy, China still places significant barriers for foreign entities to obtain renminbi.

Operations are, in general, more onerous and bureaucratic, and the Chinese financial system is nowhere near as mature as the American one. Furthermore, operations using the renmibi are a bet on the robustness of the economy there, which faltered during the pandemic and will need to overcome complex bottlenecks in the coming years to continue the upward trajectory.

Thus, it is not surprising that the Chinese currency currently represents only 4.3% of the international market, while the dollar dominates 88.3%, according to IMF estimates.

Big announcements like those about the negotiations with Brazil can give the wrong impression of the scenario, but the truth is one: in the short term, American hegemony in this chess game remains practically intact — even if, looking far ahead, Beijing has started making solid moves on the board.

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