BRICS take steps to downsize dollar
by David Marsh
Mon 18 Apr 2011
BOAO, China — China and four other leading high-growth economies have taken landmark steps toward lowering the importance of the dollar in international financial transactions — part of a seminal shift in the move towards a multicurrency reserve and trading system.
This was one of the conclusions of a summit meeting of the so-called BRICS economies (Brazil, Russia, India, China and South Africa) in the resort town of Sanya in southern China last week.
Leave aside the whimsical acronyms. The addition of South Africa to the former BRICS format seems to have galvanised the grouping. The five countries agreed to expand use of their own currencies in trade with each other — an important step toward putting the dollar into a new downsized place. One key influence is the annual expansion of China’s trade volume with other core countries by 40% in 2010 — and the buoyancy looks set to continue. The BRICS state development banks, including the China Development Bank, agreed to use their own currencies instead of the dollar in issuing credit or grants to each other — and they will also phase out the dollar in overall settlements and lending among each other.
Chinese officials at the annual Boao Forum at the end of last week voiced cautious optimism about the possibilities for far-reaching international monetary reform proposals taking a step forward when the G-20 meet in Cannes in November at the behest of French President Nicolas Sarkozy. Chief among these is for enhancing the special drawing right of the International Monetary Fund through the inclusion of emerging market currencies.
Speaking in Boao, Zhou Xiaochuan, governor of the People’s Bank of China, refused to get carried away by any of this. He gave a cautious welcome to bringing the renminbi into the SDR but admitted it had to be part of a planned move to full convertibility of the Chinese currency as well a shift to a flexible exchange rate.
Fresh signs of a disturbing lack of equilibrium in the Chinese economy, above all the latest annual rise in the consumer price index in March to 5.4% — have heightened speculation that China will speed up a rise in the renminbi to lower import prices. Governor Zhou, while not yet wishing to confirm any details, delivered a strong hint that he was prepared for such a course.
If the renminbi were to become a fully fledged reserve currency, of course, it would have to go down as well as up — marking enormous risks along the journey for the renminbi to assume a greater international role. For all of these reasons, Beijing will proceed with utmost caution in relaxing its restrictions for the currency to circulate freely overseas.
The last few days, make no mistake about it, mark an important step along this path — but there is a long way to go still.
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