General

According to the Global Financial News of China Central Radio and Television Corporation's Economic Voice, there has been a significant trend of de dollarization in international trade settlement recently. Several countries around the world have recently announced or planned to settle trade in their own currencies, which seems to be diversifying trade settlement currencies. What are the reasons for this phenomenon?

The Brazilian government recently stated that Brazil and China have reached an agreement to no longer use the US dollar as the intermediate currency, but instead use their local currency for trade. In this regard, the spokesman of the Ministry of Foreign Affairs of China responded that China and Brazil signed a memorandum of cooperation on the establishment of RMB clearing arrangements in Brazil at the beginning of this year. The establishment of Brazil's RMB clearing arrangements is conducive to the use of RMB by enterprises and financial institutions in China and Brazil for cross-border transactions, and promotes bilateral trade and investment facilitation. Trade among ASEAN member countries is also being de dollarized. The finance ministers and central bank governors of ASEAN countries recently held a meeting, with the primary focus on discussing how to reduce the dependence of financial transactions on currencies such as the US dollar and shift towards local currency settlement. Liu Ying, a researcher at the Chongyang Institute of Finance at Renmin University of China, said that in addition, multiple countries are considering using their own currencies for settlement in international trade. For the reason, she analyzed that the main reason was the risk aversion triggered by the Federal Reserve's interest rate hike.

Liu Ying said, "Recently, we have seen a series of banking crises in Europe and America, including Silicon Valley Bank, Signature Bank, and the acquisition of Credit Suisse by UBS. In fact, these nine consecutive interest rate hikes by the Federal Reserve have brought about depreciation of exchange rates, fluctuations in financial markets, and high debt risks, leading to a global trend of high risk, high debt, high inflation, and low growth. Each country is seeking to settle in its own currency

Specifically, since the Federal Reserve raised interest rates, the US dollar has appreciated significantly first and then depreciated significantly, exacerbating the exchange rate and operational risks of foreign trade enterprises in various countries. Choosing local currency settlement can effectively reduce risks. Liu Xiangdong, Vice Minister of the Economic Research Department of the China Center for International Economic Exchange, pointed out that in fact, some countries have been promoting de dollarization in the financial sector since last year. For example, Japan, France and other countries sold US treasury bond bonds sharply last year. Recently, many countries have been de dollarizing in the field of trade, indicating that the financial risks of the US dollar are being transmitted to the real economy.

Liu Xiangdong said, "In terms of trade, everyone needs to seek a more stable trading system. For example, the reason for bilateral settlement of trade with China is that China's RMB remains relatively stable among all currencies, and its assets can still be held relatively. Everyone is optimistic about China's overall development prospects and believes that policy operations will not have negative spillover effects

The reason why some countries avoid the US dollar in international trade settlement is due to their own national conditions. Economist Tan Yaling said that for example, Brazil's current external debt is mainly in US dollars, and the coverage of foreign exchange reserves is very low, so there is an urgent need for US dollars to repay debts. Recently, the depreciation of the US dollar has led to an increase in commodity prices. For example, Brazil's raw materials need to be imported from international trade overseas, resulting in higher costs. In order to consume its foreign exchange reserves, it is necessary to use foreign exchange reserves to buy. This way, Brazil does not use the US dollar as foreign exchange, and it is very suitable to settle in RMB

The use of local currency settlement for intra ASEAN trade has the consideration of reducing transaction costs and promoting international trade facilitation.

Tan Yaling introduced: "Because ASEAN itself is a system, ASEAN countries will have a better level of mutual familiarity and mutual hedging when settling in local currency. Settlement in local currency is more suitable in Southeast Asia

Liu Xiangdong said that the implementation of de dollarization in international trade settlement remains to be observed, with the main obstacle being the difficulty for enterprises to break away from their dependence on the US dollar settlement system SWIFT. At present, enterprises cannot fully accept a system that departs from SWIFT and settles entirely in local currency. This is because local currency settlement may involve a lot of exchange rate and risk management. If different countries need to settle in local currency, they will face a significant increase in transaction costs and exchange rate risk