Red march of the redback

That great powers have great currencies, as Nobel winner economist Robert Mundell had once pinned the basics of the geopolitical influence game, makes sense of China's push for making the yuan – the redback as opposed to the greenback - widely popular.

And Bangladesh is no different when it comes to Chinese assistance.

In the last four years, China has largely moved away from giving loans in dollars to the yuan. Its loan commitment in yuan has more than doubled during this time while disbursement in yuan has increased by more than seven times.

China's commitment in yuan more than quadrupled in 2016-17 from the previous year, mainly riding on three projects --- construction of a tunnel under the river Karnaphuli, Dasherkandi sewage treatment plan and procurement of six vessels.

In 2018-19, China did not disburse any of its assistance in dollars but in yuan.

China has been active in promoting its currency for quite some time, especially after the yuan obtained a reserves currency status in 2016.  

Direct investment by Chinese firms into related projects was worth $15bn last year, a quarter of which was in yuan. China now settles 15% of its foreign trade in the currency, up from 11% in 2015.

Having an international currency offers great economic and political advantages to countries, advantages that have so far been enjoyed by the US, UK, Japan and Germany.  And now China enters the fray.

Despite its huge debt and current account deficit, the US has been able to maintain the dollar as the preferred and safe international currency. The tremendous demand for US treasury bills that pushed yield to zero is just a reflection of the greenback's strength.

The major economic benefit in being a greater macroeconomic balance is that countries having reserve currencies can finance deficits in their own currencies.

But geopolitical advantages of such economic might are enormous too as frequently exercised by the US as its projection of power through its imposition of sanctions on countries it deems 'rogue' states (like Iran, Venezuela and North Korea), or it feels are working against its business interests, such as Germany.

The EU had lobbed the euro as an international currency with its large economic output, low inflation and political stability. But the underlying weakness of an aging population, low growth and harsh regulations acted against the currency.

When countries of lesser power choose what to use as reserves currency, they consider a few factors such as the inherent strength of the currency, wider use of the currency, exchange convenience and return. And, of course, the political stability of the backer of the currency, its global political outreach and its relations between states.

The yuan yields mixed ratings on these counts. It is not yet fully convertible. Although China has come out least scathed by the coronavirus pandemic because of its successful fight against the virus, its economy has been hurt by the acrimonious trade war with the US, the latest involving the Tiktok and Wechat social networking giants.

China has a stable political system and is a vast economy, second only to the US. Through its Belt and Road Initiative, it has snaked its way through rough regions, connecting a large geographical area.

China banks on Europe for its international ambition in setting up trading infrastructure schemes. Obviously, Europe feels using the yuan will boost its exports to China.

This is why the UK is today the biggest player in Europe's yuan market and is the largest clearing centre for the yuan.

But now as the US ramps up its sphere-of-influence war with China on three fronts – technosphere as exemplified by the latest US ban on Tiktok and Wechat, geopolitical front as is explained by the recent large-scale US military naval exercise in the South China Sea and trade with repeated sanctions imposed by the US, China feels it should push forward with its currency ambition. After all, both the US and the UK have funded many of their wars aided by their reserves currencies.

And so China's current five-year plan until 2020 mentions its ambition to increase international use of its currency.

However, things have played out differently on the global scale. The dollar and the euro still dominate three-fourths of the global trade, and the yuan is only the number fifth currency with a piffling share of less than 2% of international payments, although its share in global trade accounts for over 12%. However, its share in global reserves has crossed 2.1%.

The dollar alone accounts for half of international trade and 62% of central bank reserves.

However, China's ambition felt a new wind under the wings when the yuan was considered by the IMF in its special drawing rights (SDR) basket in 2016, although the Bretton Woods Institution holds the Chinese currency as quite 'closed' because of foreign investors' limited access to China's financial market.

Japan's yen, once touted as a rising reserves currency, lost its shine with the country's economy running out of steam after the 1980s.

As part of its ambition, China is now opening up its $13 trillion bond market, generating lots of enthusiasm among investors.

Other countries are also trying to shy away from the dollar. Russia, for example, has cut its dollar reserves by half.

China is now setting up clearing houses in 25 countries and wants to import more in redbacks.

So far, the US has been able to wield extraordinary power over other countries because of its dominant reserves currency through embargoes.

Russia, Iran, Venezuela and Turkey are some of the victims of its currency hegemony used as a political tool.

Rusal, a Russian aluminium firm, saw the devastating effect of such embargo in 2018, cutting it off from using the SWIFT system and thus denying it the facility of conducting its transactions in dollars.

At present, America has 30 sanctions in place against companies and countries, most of them to maintain its sphere of political influence.

On the sidelines of a recent summit, leaders from Iran, Malaysia, Turkey and Qatar proposed using crypto-currencies, national currencies, gold and barter for trade. 

It is not only China or Russia that wants to neutralise America's geopolitical influence by weaponising the dollar, Europe is weary of the dollar's overarching power as well.

Ursula von der Leyen, the new president of the European Commission, in her manifesto for 2019-24, has said: "I want to strengthen the international role of the euro." 

To trade with sanctions-hit Iran, Germany, Britain and France have created a clearing system called Instex so that firms can avoid the SWIFT.

Even allies are not spared from US sanctions. The recent American threat against a German company for letting Russian vessels help build a gas pipeline has thoroughly rankled not only Deutschland politicians but EU countries as well who have protested against the threat.