Author: brother Mao this article is reprinted with the authorization of the official account brother Mao’s horizon (ID: maogeshijue).
On August 19, Dai Xianglong, former governor of the people’s Bank of China, said at the “International Seminar on the review and Enlightenment of the 25th anniversary of the Asian financial crisis” held by the China development research foundation that it was difficult for the US economic strength to support the original position of the US dollar.
Dai Xianglong believed that we should continue to promote the diversification of international currencies. We should guard against and defuse the risk that the US dollar is both the local currency of the United States and the major international currency of the world.
Finally, Dai Xianglong proposed a package of specific solutions.
“The feasible way now is to suggest that the International Monetary Fund expand the issuance of special drawing rights (SDRs) and allow some of them to be used for the liquidity expenditure among its members. At the same time, we should promote the diversification of international currencies. We should strengthen economic and trade cooperation between China and the EU and promote the stability of the euro. We should adhere to the market driven principle and the independent choice of enterprises, and steadily promote the internationalization of the RMB. We should actively promote the settlement of trade between China and Russia and other countries in local currencies.”
Please note that as the governor of our central bank, it is unlikely that he will speak casually even after retirement. Now Dai Xianglong has not only clearly pointed out that the economic strength of the United States has seriously mismatched with the status of the US dollar, but also put forward a package of solutions. To some extent, it can be considered that this is a signal of “de dollarization” from the high level to the outside world.
Note: August 19 is a very interesting time point.
It was precisely on August 19 that foreign minister Wang Yi made a phone call to the foreign affairs adviser of the French president. This phone call was crucial to the subsequent game between China and the United States on the Taiwan Strait issue.
Therefore, on the same day, Dai Xianglong proposed the global de dollarization scheme, which is also a part of “you hit you, I hit me”.
Recently, the United States has madly organized legislators and officials to visit Taiwan. However, we have adopted both the military and financial levels. The military level is related to foreign minister Wang Yi’s phone call, and the financial level is the plan of dollarization that Dai Xianglong openly proposed.
Before analyzing Dai Xianglong’s de dollarization plan, we should first understand why it is difficult for us economic strength to support the original position of the US dollar?
Composition of international economic system
How did the US dollar participate in the international economic cycle in the past?
There are about 200 countries in the world. These countries can be divided into four categories.
The first category belongs to consumer countries, which export currency through purchasing consumer goods. The United States and Europe generally belong to this category. However, the United States is stronger and exports currency in a larger scale. The following analysis focuses on the United States;
The second category belongs to producer countries, which obtain the currency of consumer countries by exporting goods. China, Japan, South Korea and Southeast Asian countries all belong to this category, of which China exports the largest amount of goods. The following analysis focuses on China;
The third category belongs to resource countries, which obtain the international mainstream currency through the export of resources (oil and natural gas). This mainstream currency is still dominated by the US dollar. Middle East countries, Russia, Australia and Canada all belong to this category;
The fourth category belongs to soy sauce countries, which generally follow behind resource countries or sell resources, or send labor personnel to work in developed countries to exchange foreign exchange, and then buy goods needed by the national economy. Soy sauce countries have little impact on the international economic cycle and are not included in the analysis.
In the past, the international economic system was in such a circular manner——
Consumer countries export US dollars, producer countries exchange commodities for us dollars, producer countries take us dollars and buy resources in resource countries, and surplus US dollars buy US bonds;
After the resource countries exchange dollars for commodities from the producer countries, the surplus dollars also buy US bonds.
In this way, after a cycle, the dollar flows back through the US debt, forming a closed loop.
The above is the basic principle that the US dollar has become the main settlement currency in the world. The United States not only exports US dollars, but also must establish a national debt mechanism to return us dollars. This return mechanism is very important. If the United States only prints and issues US dollars, and is not responsible for recovering US dollars, then the US dollars will quickly overflow and become worthless.
Note: there are two cases in Chinese history that you can refer to.
A paper coin jiaozi issued in the Song Dynasty. In the agricultural society, it is the fastest and most convenient way to plunder folk wealth with paper money, but there is also a necessary prerequisite for this method, that is, there must be a money recovery mechanism.
Jiaozi in the Song Dynasty can be used as currency to pay taxes. Therefore, most of the time, the notes can still be kept in circulation among the people, and the people still recognize the value of this jiaozi. It was only later that the Song Dynasty had financial difficulties, more and more jiaozi were issued, and the tax collection was slower and slower, which led to the substantial depreciation of Jiaozi.
One is the treasure notes issued by Zhu Yuanzhang of the Ming Dynasty. Zhu Yuanzhang was a scoundrel. He issued treasure notes for money, but at the same time he refused to pay taxes with them, that is, he did not set up a money recovery mechanism. As a result, in a short time, Zhu Yuanzhang’s treasure notes became a pile of waste paper among the people.
From the above analysis, it can be seen that the US dollar can become a global currency mainly because of the global division of labor system, and because it has a good relationship with the production countries and resource countries participating in the global economic cycle. Everyone operates in accordance with this system.
However, in recent years, the United States has become the biggest destroyer of the globalization system for various reasons.
First, relations with resource countries are getting worse and worse.
Sanctions were imposed on Venezuela, Iran and finally Russia, kicking several resource rich countries out of the international economic system, then forcing OPEC to reduce production, vigorously developing the shale oil industry, and replacing OPEC’s reduced production share with shale oil exports. This is directly robbing wealth from the pockets of resource countries.
In the past, resource countries had little say in the international political arena, so although the United States looks ugly, one vote of resource countries can only endure.
After Trump came to power in 2017, he withdrew from the group under the banner of “America first” and became the vanguard of anti globalization. At that time, the whole world was shocked. It was clear that the dollar was the biggest beneficiary of globalization. What is trump doing to stab himself in the chest?
Next, Trump’s operation is even more intensified. He directly launched a trade war and a science and technology war against China, posing a posture of kicking the world’s largest producer out of the global economic system.
Then there was the COVID-19 epidemic. The Federal Reserve printed US $5 trillion at a time. It was totally shameless. In order to save the domestic economy of the United States, it did not hesitate to issue US dollars to make the world pay.
Therefore, since the COVID-19 epidemic in 2020, the world’s major producers and most resource countries (China, Japan, Saudi Arabia, Russia and Brazil) have started to reduce their holdings of US Treasury bonds, and the global recycling channel of US dollars has encountered intestinal obstruction.
At the national level, the United States began to reduce its holdings of U.S. debt. Instead of reflecting on its past perverse behavior, the United States has intensified its efforts, starting from 2021.
After the outbreak of the Russian Ukrainian war, European hedge funds began to flow to the United States. According to statistics, during the Russian Ukrainian war, the United States absorbed $1 trillion of hedge funds, which temporarily opened up the recovery channel of the dollar cycle, but also brought another more serious problem——
Because of the hard decoupling sanctions against Russia, Russia, a resource country that accounts for nearly 15% of global oil and natural gas exports, has been completely de dollarized; Moreover, the rogue behavior of the United States in freezing Russia’s foreign exchange reserves of $300 billion has made more and more countries in the world realize that the dollar is a dangerous currency, both from the economic and political perspectives.
On August 19, the Nikkei Chinese website published an article entitled “the end of the pattern of” one strong dollar “has begun”. The main content of this article is as follows.
The current account deficit of the United States reached a record high (that is, more US dollars were exported). In 2022, the global current account surpluses were those of China (surplus of US $279 billion), Russia (surplus of US $265 billion), Germany (surplus of US $251 billion) and Saudi Arabia (surplus of US $177 billion).
What is the status of these four current account surplus countries and the United States?
China and Russia are rivals of the United States, and neither of them can take the current account surplus to pay for the United States. Russia is the most resolute. It has not only basically sold us debt, but also removed the US dollar from the foreign trade banking system;
In theory, Saudi Arabia is an ally of the United States, but it is a competitor to the United States in the field of oil sales. In recent years, Saudi Arabia has not only slowly reduced its holdings of US Treasury bonds, but also started to tentatively settle its oil trade with China in RMB. Therefore, it is very unlikely that Saudi Arabia’s current trade surplus will pay for the United States.
In theory, Germany is also an ally of the United States, but the war between Russia and Ukraine has caused heavy economic losses to Germany. Germany has also slowly reduced its holdings of US Treasury bonds in recent years. Germany’s biggest economic goal is to support the euro, which is the largest competitor to replace the dollar. Therefore
Germany’s current trade surplus is unlikely to pay for the United States.
According to the above calculations, the major countries with current account surpluses in the world have blocked the channel of US dollar return.
The United States can only create a geopolitical crisis to attract the return of US dollars by means of a special excrement stirring stick. However, this means makes other countries in the world pay a great economic price, so the side effects are also great.
In addition, in a Russian Ukrainian war, the United States and its allies directly frozen the property of US $30 billion of Russian citizens. Such acts of looting in open flames will certainly have a far-reaching negative impact on the flow of international capital to the United States.
This series of factors has led to the danger that the dollar hegemony is facing the collapse of the domino.
External promotion and internal degradation
Tell an interesting history.
The RMB is facing a dilemma in 2010.
On the one hand, because of the long-term huge trade surplus, the offshore exchange rate of RMB is under great appreciation pressure; On the other hand, because of the 4 trillion yuan rescue, domestic prices soared, and the superposition of the two made the RMB at that time extremely distorted – External Appreciation and internal depreciation.
The appreciation of foreign trade has put great pressure on foreign trade enterprises and sharply reduced the competitiveness of China’s manufacturing industry in the world; The domestic devaluation has made the people’s bills hairy, and has a huge impact on domestic consumption.
Therefore, the performance of RMB in 2010 is the most criticized.
After 12 years of vicissitudes, the current US dollar is facing the same situation as the RMB in 2010.
On the one hand, due to the continuous interest rate hikes by the Federal Reserve and the sharp drop in the exchange rates of the world’s major freely convertible currencies (the depreciation of the euro by 20% and the depreciation of the Japanese yen by 25%), the US dollar index has been very strong recently, and is about to break through 107 to set a 20-year high;
On the other hand, the domestic inflation in the United States remains high, and the inflation in July remained at a high level of 8.5%.
Therefore, the US dollar has become what we hated most about the RMB 12 years ago – External Appreciation and internal depreciation.
The appreciation of the US dollar will greatly weaken the competitiveness of us products in the international market (such as agricultural products and energy products), leading to the expansion of the US trade deficit (more US dollars will be exported); Domestic depreciation will have a huge impact on domestic consumption, the economy will fall into recession, and the federal government’s fiscal revenue will drop.
In order to make up for the government’s fiscal deficit, the US government has to issue more treasury bonds. However, due to the intestinal obstruction of the US dollar return channel, the international market has declined to accept the US Treasury bonds. The US Federal Reserve has to issue more US dollars to accept the Treasury bonds. On the one hand, more US dollar output will aggravate the flooding of US dollars in the international market (the recovery channel is blocked), on the other hand, it will also aggravate domestic inflation, thus forming a vicious circle.
Once the U.S. Treasury bonds reach the level of 2 times of GDP (at present, the U.S. Treasury bonds are US $30 trillion, which is roughly 1.5 times of GDP, and the gap is 10 trillion, which is 2 times of GDP), this will be similar to the current level of Japan’s treasury bonds. At that time, the U.S. dollar will be as flat as the Japanese yen. Do not think about any interest rate increase (because the interest expenditure is completely unaffordable by the Finance), and you can only rely on zero interest rate to survive.
The above is the profound meaning of Dai Xianglong’s voice of “de dollarization”——
First, the US economic strength has been difficult to support the original position of the US dollar;
Second, it is necessary to guard against and defuse the risk that the US dollar is both the local currency of the United States and the major international currency of the world.
Let’s analyze the package of de dollarization solutions proposed by Dai Xianglong.
De dollarization solution
Dai Xianglong’s proposal is divided into three aspects.
First, it is suggested that the International Monetary Fund expand the issuance of special drawing rights (SDRs) and allow some of them to be used for liquidity expenditure among members. At the same time, we will promote the diversification of international currencies.
What does this mean?
It means to use
The special drawing right (SDR) issued by the International Monetary Fund replaces the global settlement function of the U.S. dollar. The U.S. dollar is the currency of the United States. This basic currency attribute determines that the U.S. dollar is mainly in the interests of the United States. Especially in recent years, when the United States is increasingly unwilling to assume global responsibilities, it is increasingly inappropriate for the U.S. dollar to continue to maintain its global currency attribute.
Therefore, it is a feasible way to replace the global currency settlement function of USD with SDR, which is also acceptable to most countries in the world.
At the same time, Dai Xianglong also proposed to promote the diversification of international currencies, which means to let more countries’ sovereign currencies participate in international settlement and flow. To put it bluntly, the US dollar is unjust. Let’s share the cake of global settlement of the US dollar.
Second, strengthen China EU economic and trade cooperation and promote the stability of the euro. We will adhere to market driven and enterprise independent choice, and steadily and prudently promote the internationalization of the renminbi.
This paragraph seems to have two meanings, but in fact it is just one sentence – the euro you go first, and the RMB stays on the ground first.
This is to take the initiative to promote the euro, the second leader of the global currency, as the first leader, while our RMB (currently roughly the fourth leader in the international settlement map) does not compete with the euro.
Writing here, some people may ask why our country did not vigorously promote the internationalization of the RMB when the US dollar hegemony collapsed?
In fact, after reading the above analysis of the US dollar, we can understand that although there are many benefits to the internationalization of the RMB (you can buy it all over the world by printing money casually), at the same time, we should also see that a country’s sovereign currency has to pay a huge price to become a global currency, and from the perspective of the history of various countries, this price will become larger and larger, and it will become more and more difficult to understand.
To become an international currency, any country’s sovereign currency must first export currency.
How to output?
There are roughly two ways, one is capital export, and the other is trade export. Let’s speak one by one.
Capital export is the export of currency to foreign countries through foreign investment. However, globalization has been developing for decades. The good and effective projects have been divided by western capital for a long time, and the rest are bone biting Projects – either the local political situation is unstable, social unrest has great potential safety risks, or the construction period is long, the return is low, and the economic risk is great.
Most of our the Belt and Road initiatives are such bone biting projects. The process is hard to describe.
Therefore, it is not reliable to expect the continuous supply of currency to foreign countries through the export of capital. There is great uncertainty in this process.
Therefore, the only way to stably export currency to foreign countries is trade export, which means that we must bear a huge trade deficit (the amount of imports is far greater than the amount of exports).
A huge trade deficit will not only bring financial risks to the country, but more importantly, when a country’s sovereign currency becomes a global currency, it is easy for its citizens to become easy-going and hard-working – after all, it is too good to buy money directly by printing money. No one is willing to do the manufacturing industry.
Spain in the 17th century, the Netherlands in the 18th century, Britain in the 19th century, and the United States in the 20th and 21st centuries have almost all followed the same path – the hollowing out of the manufacturing industry will be the result of mastering the global coinage.
China is based on the manufacturing industry, which is our foundation. It is possible to properly internationalize the RMB, but the premise is not to shake the foundation of our manufacturing industry.
This is the fundamental reason for Dai Xianglong’s clear-cut proposal to “adhere to market driven and enterprise independent choice, and steadily and prudently promote the internationalization of RMB”.
Of course, China’s ability to resist temptation does not mean that other countries can. Therefore, Dai Xianglong’s proposal of “strengthening China EU economic and trade cooperation and promoting the stability of the euro” is a very attractive proposal for the EU.
What is the status of the euro?
Because of the impact of the Russian Ukrainian war on the euro exchange rate, it will be a great temptation for the European Union if China can help to stabilize the euro exchange rate.
So, how can we make the euro exchange rate stable?
Dai Xianglong’s proposal is to “strengthen China EU economic and trade cooperation”. That is to say, if China EU Economic Cooperation (bundling) can be deepened, it is entirely possible for China to purchase more goods from the EU and reduce the EU trade deficit.
What is the specific content of “strengthening China EU economic and trade cooperation”?
That is to sign the China EU investment agreement!
This is the price offered by the Chinese side. As long as the China EU investment agreement can be signed, the Chinese side can increase its procurement of EU goods and stabilize the EU exchange rate. Now the world is rejecting the US dollar. If the US dollar fails, the euro, the second in command, can naturally get most of the global settlement shares lost by the US dollar.
Third, actively promote local currency settlement of trade between China and Russia and other relevant countries.
China is the largest producer in the world, and Russia is an important energy country in the world. Now China and Russia have set an example by directly doing business with energy countries through sovereign currency exchange, completely excluding the dollar as an intermediary.
Can other producers and energy countries follow suit?
The world has been bitter and beautiful for a long time.
In the past, everyone dared to be angry with the United States and the whole world for its reckless harvest of the US dollar. Now, China and Russia have come forward to carry the banner of the US dollar. Are you worried that there will be no successor to watch the scenery?
Face and lining
This is the first time that our high-level officials have sounded the clarion call of “de dollarization”. Because the Oriental people are reserved and introverted, they choose a retired central bank governor to give a briefing (it is the same as the Biden administration’s claim that the US congressman’s visit to Taiwan does not mean that the US government’s attitude is the same as that of the US government), but everyone who knows it knows it.
More importantly, this time, China has not only sounded the clarion call of “going to the US dollar” with a clear-cut stand, but also put forward a package of “going to the US dollar”. I believe this is the road map for China to implement the “going to the US dollar” in the future.
In fact, the United States has seriously shaken the political foundation of China and the United States by playing the trick of cutting sausages and hollowing out the “one China principle” step by step on the Taiwan issue.
Therefore, the Chinese side also played two cards to counterattack on August 19. One was foreign minister Wang Yi’s call to the foreign affairs adviser of the French president and a series of subsequent combo punches; Another card is that Dai Xianglong openly put forward a package of plans to eliminate the dollar.
The United States organized congressmen and local officials to visit Taiwan to win some face at most. However, China’s counterattack was directed at the core of the United States.
Face is nothing. As long as the inside is there, face will come back sooner or later. But if the inside is lost, there is nothing left.
This article is reproduced under the authorization of the official account cat brother’s horizon (ID: maogeshijue).