The following article is sourced from Yang Feng, the author of Yang Feng Studio
Dedollarization has become a trend that cannot be changed. However, the US dollar remains the world’s largest circulating currency and still dominates the payment methods of global currencies. These two forces are colliding.
On the other hand, the United States, Europe, and Japan and South Korea are all facing pressure from declining economic growth. Germany, the largest economy in Europe, experienced a 0.5% decline in GDP in the fourth quarter of last year and a 0.3% decline in GDP in the first quarter of this year. With two consecutive quarters of economic decline, Germany has already entered an economic recession. The economic growth pressure on the US and Western camps has greatly increased.
On the Chinese side, the economy grew by 4.5% in the first quarter, but China is also facing deflationary pressure. In the first quarter of China, the CPI increased by 1.3% year-on-year, while the PPI decreased by 1.6% year-on-year.
At this time, the world is seeking sources of economic growth and patterns of economic growth. To improve domestic economic growth, one is to stimulate the economy domestically, and the other is to cooperate with other countries to promote trade and investment, and grow together.
Today we will discuss the regional economic cooperation model that belongs to the latter. This has special significance for the international environment that China is currently facing.
1? Marshall Plan Assistance to Europe
After the end of World War II in 1945, the economies of Western European countries, which were originally part of the world’s major powers, were devastated by the war, leaving their people in dire straits and waiting for action. Western European countries urgently need to rebuild their own economies.
Two years later, in 1947, the United States proposed the Marshall Plan to provide economic assistance to Western European countries and assist in their reconstruction.
This plan was named after George Marshall, then the Secretary of State of the United States, and was officially launched in July 1947, lasting a total of four fiscal years. Although this is aid from the United States to Western European countries, as many as 16 countries ultimately received aid. In addition to Western Europe, it also includes Sweden and Norway in Northern Europe, Greece in Southern Europe, and even Türkiye. Of course, the amount of aid is highest among Western European countries.
The United States has a total amount of 13 billion US dollars through various forms such as finance, technology, and equipment. Considering inflation, this amount is equivalent to $130 billion in 2006. If converted to today’s inflation rate, it would be even higher.
This plan has a profound impact on the development of the entire European countries and the world political landscape. However, there is still considerable controversy. Some scholars believe that the European economy was in the process of recovery at that time, and the assistance of the United States was not the main reason for the European economic recovery. However, the Marshall Plan always helped to revive the European economy.
The original intention of the United States in implementing this plan was to quickly recover the European economy through aid programs, thereby being able to counter the Soviet Union and curb its expansion on the European continent.
However, this plan also brings other benefits to the United States, which has opened up the umbilical cord to European finance. American products and technical specifications have also infiltrated Europe, further opening up the European market. This is a result of combining economic trade and finance.
Especially through the financial connections within Europe and the strong external US dollar, the United States still has a significant influence on Europe’s financial industry to this day. More than two months ago, when there was a liquidity crisis in the financial industries of the United States and Europe, the Federal Reserve joined forces with the five major central banks to increase the supply of dollars and ease the banking crisis. These five major central banks are the UK, Canada, Japan, Switzerland, and the European Central Bank.
In addition, the Marshall Plan also paved the way for the United States to expand its influence on European politics. In 1949, the North Atlantic Treaty Organization (NATO) was established, establishing the unparalleled influence of the United States on European politics. At the same time, it also established the Cold War pattern of the two major groups of the United States and the Soviet Union.
It can be said that the introduction of the Marshall Plan by the United States in 1947 was the first step. The establishment of NATO in 1949 was the second step. These two moves by the United States established the pattern of the Cold War, while also establishing its leadership position in Europe and its global hegemonic power.
In December 1991, the Soviet Union disintegrated, and the global pattern shifted from the US Soviet hegemony to the US unipolar hegemony. Looking back, the economic aid provided by the United States, which originated from the Marshall Plan, played a crucial role in the formation of American hegemony.
2? China’s the Belt and Road Initiative
For China, there is no Marshall Plan, but China has the the Belt and Road Initiative of equality, mutual benefit and coexistence. In 2013, China put forward the the Belt and Road Initiative, including the Land Silk Road Economic Belt and the Maritime Silk Road. In terms of finance, it is supplemented by the Asian Investment Bank and the BRICS Bank.
The the Belt and Road Initiative, together with the two banks (the Asian Investment Bank and the BRICS Bank), has become a powerful tool for China to promote foreign trade and domestic economic development after its accession to the World Trade Organization (WTO) in 2001.
Although the United States and Europe have been slandering China’s the Belt and Road Initiative, accusing it of creating a debt trap for countries along the route. But today, ten years later, the the Belt and Road Initiative is more and more prosperous, involving nearly 70 countries and international organizations.
With the confrontation between China and the United States in recent years, as well as the continuous foreign financial sanctions imposed by the United States, China’s response measures have emerged as an “innovative” model.
The first mode is US dollar lending.
In March 2023, Brazil and China reached an agreement to no longer use the US dollar as the intermediate currency, but instead use their local currency for bilateral trade settlement.
This agreement is not uncommon, as China and Pakistan also have a set of financial operation models behind it. China provides US dollar loans to Brazil, but the repayment must be made in RMB.
Brazil is using the US dollars borrowed from China to repay its foreign debt. On the other hand, Brazil exports iron ore and soybeans to China, receives RMB from China, and then uses the received RMB to repay to China.
This is the first model, which involves borrowing in US dollars and lending out US dollars.
China has plenty of dollars on hand, so it can digest some of the dollars in China’s hands.
This model is particularly suitable for resource countries. China has a large demand for importing overseas resources. For resource countries that lack liquidity in the US dollar, there is no need to worry about not having enough US dollars to use. Moreover, both sides can also reduce the US dollar seigniorage tax and promote trade between the two countries.
The second mode is RMB lending.
This model is not the first time it has been used in Brazil. Previously, similar models were also used in currency swap agreements signed between China and some countries, such as Argentina.
In 2009, the central banks of China and Albania signed a currency swap agreement worth 70 billion yuan. The current scale has reached 130 billion RMB, which means that both parties can borrow the equivalent currency of the other party to pay for goods imported from the other country.
However, the actual result is that due to China’s lack of US dollars and foreign exchange, Chinese imports from Argentina still use US dollars. So, when Argentina imports goods from China, it can use currency swap agreements to borrow RMB from the People’s Bank of China, and then use RMB to pay for the goods imported from China.
Such an operation is equivalent to China lending US dollars to Argentina, which uses these dollars to repay debts or pay for other imported goods that must be settled in US dollars. Then Argentina owed China RMB loans.
This is equivalent to transitioning from US dollar debt to RMB debt. Of course, the Chinese side needs to bear the risk of lending money to Argentina.
On April 26th, the Argentine Minister of Economy announced that using RMB to settle imports from China would be more convenient for Argentina.
Both the US dollar lending and RMB lending models are of great help to countries that lack foreign exchange reserves and the US dollar.
This partially explains why in just one year since the Federal Reserve began raising interest rates in March 2022, the United States has raised interest rates by a total of 5%, which is a rare and intense rate hike in history. However, unlike in the past, the US dollar shortage caused by significant interest rate hikes in the United States has led to financial crises in some countries.
So far, only Sri Lanka has declared national bankruptcy. On the contrary, there are liquidity issues in the banking industry in the United States and Europe. Latin American countries, which have experienced frequent debt crises and dollar shortages in the past, have been relatively calm in this wave of interest rate hikes by the Federal Reserve.
On the other hand, through these two models, China has partially digested the problem of excessive US dollars in its hands due to long-term trade surplus.
There is another form of RMB borrowing. In March, China provided RMB loans to the Saudi Arabian National Bank, which was the first RMB loan between China and Saudi Arabia.
Saudi Arabia has plenty of dollars in its hands, and there is no shortage of dollars. So what is the purpose for Saudi Arabia to borrow RMB from China?
Of course, it is used in the circle that accepts RMB. For example, Saudi Arabia can invest this loan in Iran. Isn’t Saudi Arabia restoring diplomatic relations with Iran?
Saudi Arabia can also use RMB to purchase military weapons from China, such as 052DE destroyers, anti-aircraft missiles, J-10C fighter jets, and drones. The advantage is that when Saudi Arabia uses these yuan, it will not be monitored by the United States.
So, there are many moves, as long as there is creativity and demand, there is no fear of not being able to come up with a solution.
The third model is USD investment.
In addition to US dollar lending and RMB lending, there is a third model – US dollar investment.
This is back to the the Belt and Road Initiative, where China invests in countries along the the Belt and Road. The investment method can be infrastructure construction or commercial investment by private enterprises. This is an outward investment in US dollars, exchanged for the other party’s physical facilities or goods.
In fact, the RMB loans and US dollar loans in front are all around the countries along the “the Belt and Road”. China exports and invests abroad through US dollar funds, RMB funds, infrastructure technology, and commodities, creating a mutually beneficial effect.
At the same time, it has also brought closer the relationship between China and countries along the the Belt and Road, including economic, trade, financial and political relations. This can be called the Chinese version of the Marshall Plan, but it has a wider scope and benefits more countries.
However, unlike the Marshall Plan, China did not require any country to confront anyone or interfere in the politics of other countries. Instead, it adhered to the principles of equality, mutual benefit, and common development.
3? Breaking the US dollar harvest plan
What impact does this have on beautification? This needs to be viewed at several levels.
The first thing is to solve the problem of China having too many dollars in its hands. China is a country with a long-term trade surplus, accumulating a large amount of US dollars in its hands. In the case of a confrontation between China and the United States, the amount of US dollars held should not be too small, but not too much, thus becoming a bargaining chip for the US to impose sanctions on China.
Therefore, China must moderately digest the excessive amount of US dollars in its hands. Over the years, China has maintained its foreign exchange reserves at over $300 trillion under a long-term surplus, which is not simple.
On the second level, China provides different ways of borrowing to these countries that lack US dollar reserves, helping them solve the problem of the US dollar shortage. This is equivalent to stabilizing the economy and finance of these countries to some extent.
Some people may say that except for resource countries like Brazil, where China has a trade deficit, these countries may not be able to repay their loans to China. Isn’t China at a loss then?
In fact, external lending always faces the risk of the other party being unable to repay, which is inevitable.
But from another perspective, when the United States began to quickly raise interest rates last year to harvest the US dollar tide, what if the United States could not harvest these countries? That’s good for harvesting allies.
But the United States now faces another dilemma. Although the United States wants to harvest its allies, it cannot let them fall completely. If allies fall completely, it will also spread the crisis to the United States itself.
Therefore, when Credit Suisse exploded and Deutsche Bank also faced a liquidity crisis, so the stock price fell sharply, the United States also had to take action. The Federal Reserve, together with the central banks of the five major countries, provided dollar liquidity to solve the liquidity crisis of the allied banking industry.
Therefore, the United States is now in a dilemma. Harvesting allies has reached a certain level, and if we continue to harvest them, they will not be able to bear it. If we collapse, it may not be beneficial for the United States. But if the harvest does not continue, the United States will be unable to bear it, unable to complete the cycle of the US dollar tide, unable to pass on the crisis, and ultimately will hurt itself.
The United States wants to harvest third world countries, but the effect is limited because China provides liquidity to some countries.
The United States has been in this situation for a long time and may suffer a backlash. At this time, China used some loans or investments to help these countries stabilize their financial order and economic environment by allocating thousands of pounds in four or two ways. On the other hand, it can also help these countries avoid being harvested. Why not break the American harvest plan like this?
The third level is to promote trade with countries.
The trade war between China and the United States has been going on for five years, and although the United States has never been able to do anything to China, the risks still exist, and the United States has no intention of stopping decoupling from the Chinese economy. No matter how China provides loans or investments to these countries, in addition to helping them maintain financial and economic order, it can also promote trade between the two sides.
In the first four months of 2023, the total trade volume between China and the “the Belt and Road” countries will exceed that of the United States, Europe and Japan combined. This achievement is not easy to reach, but the result of China’s efforts over the years.
In other words, it is because China has provided funds and investment to countries along the “the Belt and Road” over the years.
On the fourth level, for decades, many countries around the world have been suffering from the tide of the US dollar. When the US dollar overflows, asset prices rise, but when the United States begins a cycle of interest rate hikes, funds begin to flee, asset prices fall, exchange rates fall, and some companies may even go bankrupt.
The Federal Reserve’s interest rate hike cycle, which began last year, adopted a model of violent interest rate hikes, in conjunction with the Russia Ukraine war, and demonstrated the method of attracting stars. At this time, China’s provision of liquidity to some countries has opened up the trend of local currency trade settlement, helped the RMB expand in internationalization, and weakened the influence of the US dollar, which can be said to be achieved with one stroke.
The more important impact is that China utilizes these models to provide financing cycles to these countries, while also creating a currency circulation system under the US dollar system. This is the circulation system for trade settlement between the US dollar, Chinese yuan, and local currency.
Under this circulation system, China has opened up a new currency circulation cycle for both these countries and itself. Under this currency circulation cycle, any participating country may be able to avoid future financial sanctions by the United States. The significance of this aspect is particularly significant.
This is truly helping others and also helping oneself.
Although this circulation cycle is currently only a small capital cycle and a small currency circulation system, it covers a large number of countries.
Under the dominance of the US dollar in the global monetary order, this is the second choice for the world, and also the second choice for the non US Western world.
With this second option, these countries can reduce the impact of the US dollar harvesting cycle and stabilize their financial and economic order. More importantly, the effectiveness of the US dollar tidal harvesting abroad will be greatly reduced, thereby weakening the US dollar hegemony and weakening its global influence.