ING Report 'De-dollarization' Gains Traction Ahead of BRICS Summit

Brazil, Argentina, and Russia Increase Yuan Payments, Spotlight on 'De-dollarization'

As the upcoming BRICS (Brazil, Russia, India, China, South Africa) summit approaches, the spotlight is on China's initiative to lead a movement towards 'de-dollarization' among emerging economies, including Brazil, Argentina, and Russia, reports the South China Morning Post (SCMP) on the 19th.

According to the report, the Netherlands-based ING Bank's recent report projected that the upcoming BRICS summit, scheduled for the summer, will likely resonate with the idea of 'de-dollarization.'

The BRICS summit is set to take place in South Africa from the 22nd to the 24th.

Leaders from Brazil, Russia, India, and South Africa, except for Vladimir Putin, the Russian President, who has an International Criminal Court (ICC) arrest warrant, are expected to attend, including Chinese President Xi Jinping.

Collectively, BRICS accounts for 8.3% of the global economy and 41.9% of the world's population.

This summit's theme is "BRICS and Africa: Partnership for Accelerated Growth, Sustainable Development, and Inclusive Multilateralism," with key issues including BRICS' expansion and external connectivity.

The ING report notes that "BRICS economic expansion can determine the pace of adoption of commercial and financial systems beyond the dollar area," which would challenge the dominance of the US dollar as the international reserve currency.

China has been advocating for 'de-dollarization,' particularly following the United States' imposition of sanctions on Russia following its incursion into Ukraine in February of the previous year.

After the Ukraine conflict, Russia's foreign assets worth around $300 billion were frozen, and major Russian banks were excluded from the SWIFT payment network.

Brazil's support has further bolstered the 'de-dollarization' movement in recent months.

China and Brazil strengthened their trade ties by using their respective currencies, the yuan and the real, during a summit held in Beijing in April.

According to their joint statement, Xi Jinping and Brazil's President Luiz Inácio Lula da Silva agreed to deepen economic, financial, and monetary dialogue and enhance local currency trade.

This move to emphasize local currency trade in the $150.5 billion trade between the two nations interpreted as a challenge to the US dollar's global dominance.

China and Brazil officially agreed in March to use their respective currencies for payment in bilateral trade.

China's central bank, the People's Bank of China, capitalized on this agreement by enabling Brazilian companies to use the China International Payment System (CIPS) instead of SWIFT, challenging the international prominence of the US dollar.

Ahead of the summit, President Lula urged for an end to the US dollar's domination in global trade while visiting the New Development Bank (NDB) headquarters in Shanghai.

He questioned, "Every night, I ask myself, why does every country have to base trade on the dollar? Why can't we have trade based on our own currency? Who decided that the US dollar should be the international currency after the gold standard?"

The NDB, often referred to as the BRICS Bank, was established in 2015.

According to information from the BRICS portal, last month, Russia's Deputy Speaker Alexander Babakov highlighted Russia's leadership in developing a joint currency for cross-border trade among developing nations.

Chinese brokerage firm China Securities, in a report on the 4th, anticipated that the trend toward 'de-dollarization' would gain momentum in the global economy, expecting that a successful alternative currency issuance could lead to a decline in the value of credit currencies like the US dollar.

However, Reuters, citing South African officials, reported on the 17th that the 'BRICS currency' was not included in the agenda of the upcoming summit.

China's yuan transactions continue to rise on the international stage.

Argentina repaid an International Monetary Fund (IMF) official with yuan through a currency swap agreement with China as the maturity date approached this month. Additionally, the country has been using the yuan instead of the dollar to pay for goods imported from China since May.

Both China and Russia have agreed to use their own currencies for bilateral trade, leading to an increase in yuan payments.

China's central bank, the People's Bank of China, highlighted its efforts to promote the internationalization of the yuan by expanding its use in cross-border trade and investment.

The ING report emphasized that "de-dollarization is mainly observed in the foreign exchange reserves of central banks worldwide," as the dollar faces competition from various currencies, including the yuan.

The report also noted that the dollar's share in global foreign exchange reserves dropped to 58.6% in the last year, reaching its lowest level since 1995 when related data was first collected.

The report concludes that "over the long term, the US dollar appears to be ceding ground to Asian currencies such as the yuan or the Japanese yen."

However, the attractiveness of the yuan still lags behind the dollar for private investors.

The share of the yuan in international assets held by central banks outside foreign exchange reserves increased from 5% to 6% over the last seven years, whereas the dollar's share in international assets held by central banks outside foreign exchange reserves was 49% last year, according to SCMP.