Could de-dollarisation develop into an irreversible historical trend?

Based on my estimates, nearly 70 countries have embarked on de-dollarisation processes of various degrees as of November 2023. These countries are trying to be less reliant on the dollar for commodities such as petroleum, as well as in trade settlements, investment and financing, and as a reserve currency. At the same time, they are also developing digital currencies and building independent cross-border payment settlement mechanisms to break free from the existing US-led, dollar-based financial system as quickly as possible.

The first breakthrough came in the petrodollar system. Starting back in 1973, the petrodollar's origin can be traced to the oil crisis caused by the Fourth Arab-Israeli War that same year.

Through the efforts of then US Secretary of State Henry Kissinger, Saudi Arabia, the top oil producer, decided to only use the dollar to price its petroleum exports. This led to the subsequent unanimous decision by the Organization of the Petroleum Exporting Countries (OPEC) in 1975 to price petroleum products in dollars and to invest the sales proceeds in US government bonds in exchange for US military protection.

The petrodollar system was thus formed and came to symbolise American control of the global economy under the Jamaica Accords following the abolishment of the gold standard.

For more than three decades after that, the world can be said to have suffered under the petrodollar system. Following the once-in-a-century global financial crisis in 2008, some countries increasingly felt that they were involuntarily paying the price for the dollarisation of the global economy. So, emerging economies with greater awareness of financial sovereignty and national security began to explore de-dollarisation, with bilateral currency swaps becoming a standard tool to do so.

Due to US economic sanctions, Iran has adopted settlement methods such as settlement in the Iranian rial, barter trade and oil for gold, in its international petroleum trade since 2012.

The third largest oil producer in the world, Russia, launched crude oil futures priced in roubles instead of dollars for its petroleum trades with Iran and China in 2014. It also set up a natural gas exchange to promote the trading of natural gas priced in roubles. Following the outbreak of the Russia-Ukraine conflict in 2022, the severe financial sanctions imposed by the US on Russia have also forced it to de-dollarise its commodity trades.

In January 2023, Saudi Arabia announced its intention to allow petroleum and natural gas trade settlements in currencies other than the dollar. Additionally, it is also considering the renminbi as settlement currency in its petroleum trades with China and the inclusion of RMB-denominated futures into the pricing system of Saudi Aramco. This is the first time in 48 years that Saudi Arabia has expressed a willingness to trade in a currency other than the dollar, becoming a harbinger of the winds of change. 　　

As the world's largest oil importer, China has dedicated efforts to expand the role of its currency in the pricing and settlement of petroleum trades; rolled out crude oil futures that are priced and settled in renminbi; and using the renminbi in its natural gas trades with Russia. In March 2023, China also concluded its first liquefied natural gas (LNG) purchase settled in renminbi from France. In October 2023, it also reached a milestone with its first cross-border digital renminbi settlement for crude oil.

From the viewpoint of financial competition between states and the history of global currencies, while de-dollarisation is not fictional, it is still in its infancy and a long way off from threatening the foundation of the dollar. The dollar is still the global currency of choice for pricing, payment, investment and financing, and national reserves.

Other than the limited threat posed by the euro, no other currency, including the renminbi, can seriously threaten the dollar within the next seven years at least. In this context, occasional claims of an impending de-dollarisation wave on we-media and some Chinese state media seem both slipshod and irresponsible.

According to the Society for Worldwide Interbank Financial Telecommunications (SWIFT), in 2022, the dollar accounted for 41.3% of all international payments, well ahead of the euro with 35.7%, the British pound with 6.5%, the yen with 2.8%, and the renminbi with 2.3%.

The International Monetary Fund (IMF) reported that as of the end of 2022, the dollar made up 58.4% of the official foreign exchange reserve currencies of countries worldwide, nearly thrice that of the euro, which is in second place with 20.5%.

Furthermore, according to foreign exchange trade data (200% aggregate for both buy and sell) from the Bank for International Settlements (BIS), the dollar topped with 88.5%, while the euro was in second place with a share of 30.5%. These show that there has been no fundamental change to the dollar's global dominance.

While de-dollarisation itself is nothing new, the US is most worried that it could develop into an irreversible historical trend.

In terms of international standing or actual wealth, the US today is not in the same league as its predecessor in the early days of the Bretton Woods system. The US is in heavy debt. Since 1960, the country has raised its debt ceiling around 80 times to reach the current US$33 trillion. Its approach of using debt to drive economic growth is essentially the same as drinking poison to quench thirst. Coupled with its endless manoeuvring to weaponise the dollar, the US will eventually deplete the reputation it accrued since the establishment of the Federal Reserve in 1913.

Since the Industrial Revolution, only the pound and subsequently the dollar have been the preeminent global currencies. Prior to the establishment of the Bretton Woods system in 1944, the UK led the international monetary system and global financial order for a long time.

Even though the US already surpassed the UK as the biggest industrial nation in 1894, it still took the US nearly 50 years and the devastation caused by the two World Wars before it was able to take over the global financial sceptre from a weakened UK at the Bretton Woods Conference. While this is, on the one hand, testament to the enduring hegemony of the pound as the primary global currency, it is also proof on the other hand that the development and expansion in scope of any successor currency is a slow historical process.

Entering the 21st century, the sudden emergence of and brief optimism surrounding the euro made Jim Rogers, the poster boy of American financial capital, worry that the days of the dollar as the main global currency were numbered. Even the typically conceited Wall Street Journal shared Rogers' worries and claimed that "we are standing at the precipice of an unprecedented currency collapse and many are searching for dollar replacements".

In November 2010, Robert Zoellick, then president of the World Bank, wrote in the Financial Times urging leading economies to consider readopting a modified global gold standard that can guide currency movements. He also called for the establishment of a new system that "is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account".

He also added that "the system should also consider employing gold as an international reference point of market expectations for price pressures and future currency values".

Evidently, Zoellick, who was au fait with the intricacies of global competition, recognised that the US had long overexerted itself and could not use the dollar to hold sway over the world forever. So, he hoped to promote the set-up of a new system to end the state of directionless drift in the international monetary system after the dollar was decoupled from gold.

However, continental European countries with their fatal flaws lack the financial sophistication of the US. The European debt crisis that followed the 2008 global financial crisis made it clear to the world once more that it is still a tall task for the global economy to free itself from the dollar's control in an international financial ecosystem where the dollar's collapse lacks institutional foundation.

In the 15 years between 2008 and 2022, the US's GDP expanded from US$14.77 trillion to US$25.46 trillion. In 2008, its GDP accounted for 23.03% of the global economy and this percentage reached 25.32% in 2022.

Going solely by this key economic indicator, it can be argued that there is no sign of any palpable slide in the US's position in the global economy; on the contrary, it has made steady gains.

As for China, whom the US regards as its main strategic competitor, its GDP grew from US$4.59 trillion (7.16% of the global total) in 2008 to US$17.96 trillion (17.86% of the global total) in 2022. To the Americans, China is catching up with its pace of development and enjoying greater global influence with each passing day, and has the greatest incentive to push for de-dollarisation.

The US has also noticed the increased usage of renminbi in the settlement of bilateral trades involving China. Collating data from companies and institutional investors, it was found that between April and June 2023, the usage of renminbi as the currency of settlement reached 49% to surpass that of the dollar for the first time. It should be noted that this percentage did not include RMB-based settlements for trade and capital transactions that did not involve China as a counterparty. Figures from SWIFT show that as of November 2023, in terms of the share of global settlements, the dollar placed first with 47.08%, while the renminbi placed fourth behind the dollar, the euro, and the pound with 4.61%.

It is anticipated that the US can still effectively lead the international monetary system until 2030, but in all likelihood, the market share of the dollar and its usage in pricing, payment, investment and financing, and as a reserve currency will come under pressure from the rise of the renminbi.

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