The US emerged as the world's only superpower following the two World Wars. The US dollar dethroned the Pound Sterling and soon became the world's most valuable currency for global trade, courtesy of the Bretton Woods Agreement of 1944. The rules of commerce and finance between countries in the Bretton deal are still enforced today through the International Monetary Fund. While Japan, Canada, Australia, and Western European countries benefited from this new financial order in the aftermath of perpetual wars, it was the US that stood to gain the most from using the dollar as the intermediary currency for settling international transactions. Today, the US Department of the Treasury oversees global financial transaction systems, including SWIFT, owing to the unique position the greenback occupies in the global financial order.
China is the biggest challenger to the dollar's economic hegemony. Having attained the world's second-largest economy, China has achieved the extraordinary feat of becoming the chief trading partner with 128 out of 190 countries by 2018. As the dominant global trade partner, China has embarked on a course to rewrite the rules of the West's financial order in a process known as dedollarization. To give you a better understanding of what dedollarization entails, let's look at the recently announced China-Brazil trade deal.
The plans between the largest economy in Latin America and the Red Dragon have been underway since March 2013. After a 20-year wait, China and Brazil have finalized a bilateral trade agreement that will see the two countries trade in mutual currencies. The People's Bank of China (PBOC) declared at the high-level China-Brazil business forum in Beijing that these agreements would enhance the utilization of the renminbi for cross-border dealings between companies and financial establishments in both nations and additionally aid in promoting trade and investment between them.
In other words, companies in China and Brazil will now have the option to conduct their large-scale trade and financial transactions directly by exchanging their currencies, the yuan and the real, instead of having to use the US dollar as an intermediary. The move is certainly strategic when you consider that China is Brazil's largest trading partner, to the tune of $150Bn in bilateral trade in the previous year. Additionally, China accounts for one-third of Brazil's export market. The ability for both countries to engage in large-scale trade without reliance on the US dollar would ease the cost of business significantly.
Tatiana Rosito, the Secretary for International Affairs at Brazil's Ministry of Finance, has stated that another 25 countries are currently settling their transactions with China using RMB Yuan. This is creating a new financial architecture that is independent of the dollar and US oversight not only for China but other countries as well.
The recent global economic crises have also raised alarms locally about dependence on a single reserve currency. Following a surge in inflation to a six-year high in August 2016, the governor of the Kazakhstan central bank emphasized the need to initiate dedollarization. The internationalization of the Chinese Yuan through bilateral trade treaties offers countries that have fallen behind due to dollar inflation an alternative. Reducing the risk of exchange rate fluctuations is a strong incentive for countries to sign up for a trade pact with China.
Hong Hao, the chief economist at GROW Investment Group, has stated that due to US financial sanctions that have impacted the dollar's status as a global currency, many countries, including Saudi Arabia, Russia, and Brazil, are seeking an alternative to the current dollar-dominated system, which has led to an increase in the global adoption of the RMB.
Zhou Mahou of China Everbright Bank equally concedes that the financial sanctions imposed by the United States since the beginning of the Ukraine crisis have, to some extent, caused a "confidence crisis" for the dollar, leading to an increase in the worldwide use of alternative currencies.
According to the recent SWIFT reports, the Chinese RMB has held its position as the fifth most widely used currency among major currencies for the 13th consecutive month. This is potentially attributed to China's efforts in developing a more robust international monetary system that is less reliant on the US dollar and more favorable for trade expansion, a move that has been well received by the global community.