Why China and Russia are reducing their exposure to the U.S. dollar
Matteo Giovannini

Editor's note: Matteo Giovannini is a finance professional at ICBC bank in Beijing and a member of the China Task Force at the Italian Ministry of Economic Development. The article reflects the author's views, and not necessarily those of CGTN.

Nowadays the mainstream media is mainly focusing on the daily events relating to the trade war between the U.S. and China to understand what kind of consequences and impact it will have on the economy and on global politics. What has not received adequate coverage is the tectonic movements that countries such as China and Russia are making in order to reduce their reliance on the U.S. dollars.

The current global financial system is highly U.S. dollar-centric and larger emerging and developed economies aim to move to a multipolar reserve currency world. Among them, China and Russia are the most active ones taking action to increase their ability to resist the U.S. dollar hegemony and reduce the U.S. ability to weaponize the dollar as a foreign policy tool.

Russia, for example, is issuing a yuan-denominated bond, which could be a shield from U.S. tariffs and sanctions. The issuance of yuan bonds have been planned since 2016 and it is expected to be issued by the end of this year or early 2020. This event would mark the first time that Russia issues sovereign debt in the Chinese currency.

The move is due to the changed global political landscape for both China and Russia that has pushed the two countries into a closer partnership. It's a clear step to prevent the power of the dollar from hurting China and Russia's national interest and it also represents a bridge for investors of these two countries. 

Russia has progressively reduced the U.S. currency share from its international reserves in the past year, increasing gold, yuan and euro holdings.

Both Russian Central Bank and Russian National Wealth Fund have intervened in this direction explaining that the geopolitical risk represents a key factor in determining the new structure. The Chinese yuan has seen the biggest boost in Russian foreign reserves surging from 5 percent to over 14 percent. The euro has accounted for over 30 percent while gold reserves have reached over 18 percent of Russia's international holdings.

China is working on developing a digital currency system. /VCG Photo

China is working on developing a digital currency system. /VCG Photo

Being the holder of over one trillion dollars of U.S. government debt, China is heavily exposed to the U.S. dollar and, as a consequence of a possible risk of decoupling from the U.S., China is now diversifying its foreign reserves reducing its dependency on the U.S. dollar and the pace of diversification into other currencies such as the British pound, the Japanese yen and euro as well as gold reserves will likely speed up going forward. The reduced reliance on the U.S. dollar financial conditions can offer China more room for the yuan to play a bigger role on the global stage.

China seems to be an even more forward-thinking with its planned launch of a cryptocurrency backed by the People's Bank of China (PBOC) that will encourage worldwide use of the yuan in order to protect its foreign exchange sovereignty. Having a proprietary digital currency could allow China to better monitor the monetary supply intervention and prevent corruption and money laundering.

Probably the most interesting aspect of the Chinese cryptocurrency is that it can be seen as a way for a global distribution of the yuan by the PBOC and commercial banks through a mechanism by which the yuan can be used in everyday transactions all around the world and a foundation for the internationalization of the yuan using the Belt and Road Initiative as the first channel.

Cryptocurrency is considered as one of the top currencies because they are digital currencies that have the reach of the internet and can go anywhere the internet can reach. It is also very powerful because they can bypass Western banking systems such as SWIFT, a network that enables financial institutions worldwide to send and receive information about financial transactions, making them extremely strategic.

The attention of financial observers to the future launch of the Chinese digital currency has been amplified by the recent support in investments in the blockchain technology expressed on several occasions by the Chinese leadership that considers it as a "core technology".

The strategic decisions taken by China and Russia could have a rebalancing effect on the strength and influence of the U.S. on global financial markets. The de-dollarization has already become an ongoing process that could reduce the dominance of the U.S. dollar globally and see the rise of other currencies such as the yuan for a better representation of the growing weight of emerging economies.

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