The most recent proposal for an Asian Monetary Fund (AMF) came at a time when the combination of rising geopolitical tensions, supply chain disruptions, and US interest rate hikes has greatly exacerbated economic vulnerabilities among trade-dependent Asian countries to exogenous geoeconomic turmoil.
The renewed interest in AMF is not a sudden development or a singular event. Rather, it is a continuation of existing regional currency cooperation since the 1997 Asian financial crisis. It also comes at a time of increasing initiatives to promote the use of local currencies in international trade and investment and developing alternative payment and settlement infrastructures. In the region, China has arguably made the most progress in promoting the broader use of the renminbi and renminbi-based payment and settlement infrastructure. Such development reflects strong desires in the region to improve economic autonomy, strengthen financial security, and develop mechanisms to defend against external geoeconomic shocks.
Over the past four decades, emerging markets -in particular Asian economies- have often found themselves at the receiving end of Western economic and monetary cycles. The 1997 Asian financial crisis, the 2007-2008 global financial crisis, the COVID-19 pandemic-induced economic turmoil, and the cycles of US quantitative easing, tightening, and interest rate hikes, have spurred demand for regional and multilateral currency cooperation from Asia, Africa, to Latin America. Since then, ASEAN + 3 (China, Japan, South Korea) as a group has crafted and expanded a regional currency architecture through the Chiang Mai Initiative. Likewise, leading emerging market economies, such as members of BRICS, have also demanded to diversify the dollar-based international currency system.
Since last year’s Russian invasion of Ukraine and G7’s punitive sanctions against Russian individuals and entities, great power competitions have amplified latent geopolitical tensions and accelerated the development of alternative financial infrastructures independent of the existing US-dollar based system. The West’s decision to freeze Russian foreign exchange reserves – and proposals to use Russian reserves for Ukraine reconstruction – has particularly been controversial. Yu Yongding, a Chinese economist, called this “a blatant breach of trust” and proof of the US government’s “willingness to stop playing by the rules” (Yu, 2022).
This is set in the backdrop where capital had started to leave emerging Asia in June 2021 as investors expected interest rate hikes in the US and Europe (Nakano, 2021). As major Western central banks raised interest rates over the past year, Asian economies especially ASEAN countries experienced currency depreciations, risking a trigger of capital flight if the trend continued. Asian economies have therefore accelerated their move towards using local currencies for trade and reducing dependence on the dollar. At the ASEAN Summit held in May 2023, ASEAN members agreed to push for better regional payment connectivity and the use of local currency transactions (Medina, 2023). In August, central banks of Indonesia, Malaysia, and Thailand signed an agreement to expand the framework to include more eligible cross-border transactions beyond trade and direct investment. This agreement builds upon a currency framework launched by Indonesia, Thailand, Malaysia, and the Philippines in 2017, to coordinate their efforts to promote the use of local currencies in trade and investment.
The trend of reducing dependence on the dollar in Asia is not a fad; it is a persistent commitment. While members of ASEAN have primarily pursued regional currency cooperation to reduce dollar dependence and vulnerabilities to external shocks, China’s initiatives have been much broader. While all these initiatives are de-dollarization in action, their goals do not start with dethroning the US dollar as the dominant currency. The ultimate goal is to shelter against external economic, financial, and geopolitical risks originating in the dollar-based global financial system. As geopolitical tensions between China and the United States sustain, China’s attempts to defend its economic and financial security also reflect the need to reduce China’s geoeconomic vulnerabilities, such as threats of sanctions and potential financial warfare.
For the decade since the Asian financial crisis to the global financial crisis, reducing economic vulnerabilities from Western economic cycles was the primary driver for the Chinese government to support Asian currency cooperation and pursue the broader use of the renminbi. As geopolitical tensions escalate and the relationships with the United States deteriorate, the consideration to reduce China’s geoeconomic vulnerabilities, hedge against US sanctions, and safeguard China’s national security by bolstering financial security against geopolitical shocks has further motivated the Chinese government to pursue de-dollarization initiatives and develop a renminbi-based financial system. Given that China is the largest trading partner of more than a hundred countries and is deeply integrated into global supply chains, China’s trading partners naturally have incentives to hedge against supply chain disruptions and protect their own economy against severe collateral damages caused by potential US sanctions against China.
To be clear, while China has been a leading actor in developing an alternative financial system, its effort does not start with the motivation to dethrone the US dollar’s dominant currency status but rather to improve its financial security. No Chinese official has ever stated dethroning the US dollar as China’s strategic agenda. Rather, they have been conscientious about China’s vulnerability to the dollar’s dominance in the global financial system. China’s reaction to the 2007-2008 global financial crisis was a case in point. At a press conference in March 2009, Premier Wen Jiabao openly expressed the Chinese government’s concerns about the safety and security of China’s holdings of US assets and urged the US government to maintain its credibility and ensure the safety of those assets (Wen, 2009). China’s recent acceleration in promoting the use of the renminbi and expanding the renminbi-based financial infrastructure has been the product of Beijing’s concerns about potential financial warfare inflicted by the US. The escalation of US-China trade tension since 2018 and G7’s sanctions against Russia have propelled Chinese scholars and the policymaking community to strategize on how to immunize the Chinese economy against Western sanctions and strengthen China’s financial security.
Financial security has become an indispensable part of China’s national security discourse since the 1997 Asian financial crisis. Addressing the National Finance Work Conference in November 1997, President Jiang Zemin stressed that “ensuring financial security, efficiency, and stability is a basic prerequisite for the sustained rapid development of the national economy” (Jiang, 1997). He warned, “if the financial system is unstable, it would inevitably affect economic and social stability”. President Jiang’s speech reflected the normative impact of the Asian financial crisis on the conceptualization of national security, financial governance, and financial risk management among the third generation of CPC leadership. Thereby entrenching the notion that national security could not be narrowly defined by military competencies and defense capabilities but must also include financial security.
Financial security is also a core aspect of President Xi’s “Comprehensive National Security.” In his address to a Politburo study group in April 2017, Xi Jinping, as the General Secretary of the Party, emphasized that “financial security is an important part of national security…… and fundamental to China’s overall economic and social development.” (Xi, 2017). At a conference held at the end of October 2023, Xi reiterated this exact message and pointed out that “preventing and managing risk is a perpetual theme of financial work. Xi was not shy to elaborate on the geopolitical challenges to China’s financial security and observed that “a small number of countries treat finance as tools for geopolitical games. They repeatedly played with currency hegemony and frequently wielded the big stick of financial sanctions. … All these have presented new challenges to maintaining financial security under the new situation.” (Xi, 2023). Under Xi’s leadership, defending China’s financial security means not only managing market risks but also geopolitical risks. This means developing alterative systems to hedge sanction risk and reducing the dependence on US dollar in international trade and investment has become a priority of the Communist Party of China.
Since Xi came to power, he has emphasized “the bottom-line way of thinking” to prepare for the worst-case scenario and “prevent macro risks that may delay or interrupt the process of the great rejuvenation of the Chinese nation.” To prepare for worst-case scenarios, such as a military conflict over Taiwan, Beijing places importance on the need to enhance the country’s economic resilience in addition to augmenting the military combat capacity. Chinese policymakers have taken steps to modernize the People’s Liberation Army (PLA), sanction-proof its economic and financial system, and seek to strengthen self-reliance across several areas, such as food security, supply chains, and technology and innovation.
Over the past two decades, the Chinese government has pursued two mutually reinforcing approaches to push for reforms of the existing US-led system while developing an alternative. One approach has been to support regional currency cooperation with its neighboring countries and non-Western multilateral partnerships to increase the use of local currencies in trade and investment. The other has been to improve the broader acceptance of the renminbi in international trade and investment.
Since the 1997 Asian financial crisis, China has supported and promoted regional currency cooperation, with the primary goal of enhancing regional ability to defend against financial risks. The crisis drove demand for a regional currency arrangement to address short-term liquidity difficulty for regional members and reduce reliance on the International Monetary Fund (IMF). Japanese finance authorities proposed to establish an Asian Monetary Fund (AMF) but failed due to the US government’s opposition. In May 2000, ASEAN+3 (China, Japan, and South Korea) managed to launch the Chiang Mai Initiative (CMI), the first regional currency swap arrangements, as an incremental step and laid the foundation for continued regional currency cooperation. The CMI is composed of the ASEAN Swap Arrangement among ASEAN countries and a network of bilateral swap arrangements among ASEAN+3 countries. Under the framework of CMI, by the end of 2008, China had signed six bilateral currency swap agreements with Japan, South Korea, Thailand, the Philippines, Malaysia, and Indonesia, totaling $23.5 billion, of which China committed $16.5 billion.
A decade later, in May 2008 amid the 2007-2008 global financial crisis, ASEAN+3 (China, Japan, and South Korea) finance ministers agreed to establish a regional foreign exchange reserves pool with a minimum amount of $80 billion, which later increased to $120 billion with China and Japan each contributing $38.4 billion (each 32%) and South Korea $19.2 billion (16%) (ADB, 2009). And, in December 2009, an Asian regional foreign exchange reserves pool was launched. In March 2010, ASEAN+3 finance ministers and central bank governors meeting clarified that countries could implement local currencies – US dollar swaps in the $120 billion collective regional foreign exchange reserves pool. In May 2012, the size of the regional foreign exchange reserves pool had increased to $240 billion.
In dealing with the economic shocks of the COVID-19 pandemic, at the G20 meeting in February 2022, China’s central bank, the People’s Bank of China (PBOC) Governor Yi Gang said that China would work with Asian countries to promote the use of local currencies in trade and investment to strengthen regional financial security and resilience against external shocks. In June, the PBOC and the Bank for International Settlement launched an RMB Regional Liquidity Arrangement, with the participation of Bank Indonesia, the Central Bank of Malaysia, the Hong Kong Monetary Authority, the Monetary Authority of Singapore, and the Central Bank of Chile (BIS, 2022). The goal is to “provide liquidity through a reserve pooling scheme to participating central banks from the Asia-Pacific region.” Renminbi is not the only currency deposited in the arrangement facility. BIS specified that “each participating central bank contributes a minimum of RMB 15 billion ($2.2 billion) or US dollar equivalent, in RMB or USD, placed with the BIS, creating a reserve pool.” This arrangement has since become an additional liquidity support for participating central banks in times of market volatility. Over the next decade, China and other fast-growing economies will likely continue using regional currency cooperation to push for global reserve currency system diversification.
China’s pursuit of currency cooperation has expanded beyond its immediate neighbors but also through regional intergovernmental partnerships, such as the Shanghai Cooperation Organization (SCO) and BRICS. China has intended to use the SCO framework to promote local currency settlements since before the launch of the Belt and Road Initiative in 2013. For example, at the 2012 SCO Business Forum, China’s then-Vice Premier Wang Qishan emphasized the importance for SCO members to promote using local currencies in trade settlement, expand bilateral currency swaps, and strengthen regional financial cooperation (Wang, 2012). At the 2022 SCO Summit in Samarkand, members agreed on a “roadmap” to expand trade in local currencies. At the 2023 Eastern Economic Forum, a Russian platform for global and regional cooperation held in Vladivostok, SCO Deputy Secretary-General Sohail Khan disclosed that the SCO has listed scaling-up local currency settlement among its member countries on its agenda, suggesting members have made progress towards the “roadmap” to reduce dependence on the dollar (Chu, 2023).
BRICS members have demanded a more diverse global financial system since 2009 amid the global financial crisis and actively pursued initiatives to develop and expand alternatives to the Society for Worldwide Interbank Financial Telecommunications (known as SWIFT) and Clearing House Interbank Payments System (known as CHIPS). Examples like China’s Cross-Border Interbank Payment System (CIPS), Russia’s Financial Messaging System of the Bank of Russia (SPFS), and India’s INR/ Local Currency Settlement System (INR/LCSS) illustrate this trend of financial infrastructure development to support local currencies for cross-border settlements. Furthermore, the New Development Bank since its establishment in 2014 has committed to promoting local currencies in trade and financing to reduce the dependence on the dollar.
While Chinese policymakers have not publicly described de-dollarization or dodging sanctions as their policy goal, other members of the SCO and BRICS have been outspoken. For example, Iran, who joined SCO as the ninth full member in July 2023, has decades of experience coping with severe Western sanctions, and the regime firmly favors de-dollarization. Iranian President Ebrahim Raisi made it clear that Tehran sees SCO membership as a way to help thwart American unilateralism and bypass sanctions (Iranitl, 2022).
Although the Chinese government remains hesitant to liberalize China’s capital account, it has pushed to make renminbi bonds acceptable collaterals for derivatives. In March 2021, the China Central Depository & Clearing and ISDA published a whitepaper that analyzes the use of Chinese government bonds as initial margins for derivatives transactions (ISDA Report, 2021). Hong Kong Exchanges and Clearing and the London Stock Exchange are working towards including Chinese government bonds as eligible collateral (Liu, 2023). Once materialized, this will increase the functionality of Chinese government bonds in international financial markets, create more demand for them, and be conducive to building liquidity in the Chinese government bond markets. In the long run, increased global demand for Chinese government bonds and sufficient liquidity in the market would contribute directly to improving the renminbi’s status as a global reserve currency.
Russia’s weaponization of energy exports at a time of growing climate concerns has incentivized Western economies to accelerate the energy transition and move away from hydrocarbon. The US dollar’s dominance in the hydrocarbon-powered global economy is not guaranteed to transfer automatically into a decarbonized world. Chinese policymakers are keen on capitalizing on the clean energy transition to improve the renminbi’s pricing power in global commodities markets. They consider improving the renminbi’s commodities pricing power necessary to reduce China’s strategic vulnerabilities in the dollar-dominated world and a critical step towards renminbi internationalization.
To this end, China has been developing renminbi-based commodities pricing and trading marketplaces at domestic resource hubs and financial centers. For example, China launched Baotou Rare Earth Products Exchange in Inner Mongolia in 2016 with plans to elevate it as a national exchange. It launched renminbi-denominated oil futures and copper futures on the Shanghai International Energy Exchange in 2018 and 2020, respectively. At the end of 2019, it launched the Ganzhou Rare Metal Exchange for spot transactions in rare earth products, molybdenum, tungsten, tin, cobalt, and other metals (Chinatungsten, 2020). Chinese national oil company CNOOC and France’s TotalEnergies completed China’s first renminbi-settled LNG trade through the Shanghai Petroleum and Natural Gas Exchange (Hayley, 2023). The development of these renminbi-based pricing mechanisms and trading marketplaces paves the way for improving the role of the renminbi in the price discovery of commodities, especially minerals deemed critical for energy transition.
Based on these developments, China-led non-Western regional and multilateral partnerships, such as the SCO and BRICS, are poised to scale up local currencies for commodities trade and the use of the renminbi in commodities pricing, thereby accelerating the development of alternative financial systems. Supported by China, the recent expansion of SCO and BRICS gained the two groups significant weight as commodities blocs, matching China’s desire to improve the renminbi’s pricing power in global commodities markets. SCO members comprise major hydrocarbon and minerals exporters (such as Central Asian countries, Russia, and Iran) and consumers (China and India). Although the recent expansion of BRICS to include Saudi Arabia, UAE, Iran, and Argentina, among others, aggravates its internal incoherence, the addition of new regional powerhouses materially increase the group’s aggregate financial power and its relevance for energy transition across dimensions of hydrocarbon, critical minerals needed for clean energy transition, and clean energy technology and manufacturing capacity. SCO and BRICS have three of the world’s five largest lithium producers in the world: China, Brazil, and Argentina. Iran is home to the world’s largest proven zinc reserves, second largest copper deposits, tenth largest uranium reserves, and 12th largest iron ore. In February 2023, the Iranian government announced the discovery of its first lithium deposit that potentially holds 8.5 million tons (Ross, 2023). If this estimate is proven accurate, then Iran would hold the second-largest lithium reserves in the world, second only to Chile’s 9.2-million-ton deposit, further adding to the weight of BRICS and SCO as mineral resource-rich groups that also have intentions to promote the use of local currencies in energy trade and settlement.
The Chinese government has also attempted to increase the international investability of renminbi assets by pursuing financial market cooperation with leading resource-rich economies and global financial centers as an intermediate step towards improving the renminbi’s status as a reserve currency. The Shanghai Stock Exchange has signed an agreement with Saudi Tadawul Group, the operator of the Saudi Exchange, to collaborate on cross-listings, fintech, data trade, ESG, among others (SSE, 2023). In the long run, closer alignment between China and leading resource-exporting countries may increase their mutual holdings and reduce dependence on US assets as reserves.
Existing global financial structures, underpinned by US leadership, the US dollar’s dominance, and a prevailing framework of global rules and international institutions born of Western designs and principles, have withstood waves of challenges. China is not, for now, attempting to seek to dethrone the US dollar and replace the dollar’s dominance in the global system with the renminbi. Rather, it has been pursuing local currency cooperation and promoting the broader acceptance of the renminbi to strengthen its financial security and defend against financial risks and increasingly, geopolitical risks. While China has supported Asian currency and monetary cooperation since the Asian financial crisis, developing regional currency and financial architecture is only part of China’s de-dollarization approach to reduce its vulnerabilities in the dollar-based global financial system.
To be sure, G7’s sanctions against Russia has not precipitated an immediate crisis of confidence in the existing US led financial system or weakened the dollar’s reserve currency status. The dollar’s global reserve currency status rests on the soundness of the US economy and the attractiveness of the US markets and has been supported by – and has supported – the dominance of the US military-industrial complex and US military supremacy and security alliance. As Colin Weiss observed, around three-quarters of foreign government holdings of safe US assets are by countries with some military tie to the United States (Weiss, 2023). Despite the rise in the use of local currencies in trade settlement over the past two years, the dollar still represents the lion’s share (58.88 percent) of global foreign exchange reserves as of Q3 2023, whereas the renminbi occupies merely 2.45 percent, a small increase compared with 1.08 percent in 2016 (IMF Data, 2023).
This does not mean sanctions will never chip away the dollar’s dominant reserve currency status. If sanctions have severe blowback to the US economy and exacerbate cyclical downturns, the risk of a major recession could be significantly higher. Another economic recession could weaken global confidence in the US government’s credibility and commitment to honor the safety and security of foreign holdings of dollar reserve assets, especially US Treasuries and agency securities.
In the extreme scenario – such as a militarized conflict over Taiwan – in which the United States were to impose severe sanctions against China, potential costs on the sanctioners would likely be higher than current sanctions against Russia, especially if such a scenario were to happen earlier than multinationals were able to complete their supply chain diversification strategies. China’s economic structure is far more complex than that of Russia, its high degree of integration into global supply chains across nearly all industrial sectors, and its exports are far more diverse and complementary to Western economies than that of Russia. The risk of a global economic contraction resulting from the West’s sanctions against China is considerably higher than that associated with current sanctions against Russia. Western consumers and households would likely feel the economic pain inflicted by the cost of sanctioning Chinese entities, a potential cause for domestic political backlash in the West.
Dr. Zongyuan Zoe Liu is Maurice R. Greenberg Fellow for China Studies at the Council on Foreign Relations (CFR).
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