#Bolivia Wants to #De-couple from the #US #Dollar in Favor of the #Yuan

Bolivia Today ©

The Bolivian government, led by Luis Arce Catacora, has been contemplating a significant decision—adopting the Chinese yuan as its primary currency for trade and financial transactions, a move that has been deemed as de-coupling from the US dollar or simply, de-dollarization. Such a move would have far-reaching implications for Bolivia's economy, trade relations, and geopolitical standing.

Arce has been arguing in favor of de-dollarization in the last weeks in several interviews. He based his argument on the fact that several countries have started using the yuan as a real alternative. He cited countries such as Russia, India, and South Africa as well as emphasizing the intentions of Brazil and Argentina in making payments in yuan. According to his understanding, the world is going through a shift in economic terms where the Chinese currency will become a real alternative currency against the dominance of the dollar. Arce said he thinks there is no going back, and that Bolivia should go down this road (see a video in Spanish here).

What would be the implications for Bolivia?

On the one side, adopting the Yuan as the primary currency would lead to the diversification of the country's reserves, which would reduce an overreliance on a single currency and its associated risks. A broader basket of currencies, including the yuan, could provide stability and resilience to Bolivia's economy, particularly in times of global financial turbulence.

Moreover, it could enhance trade relations with China. China is the world's second-largest economy and a major trading partner for many countries. By adopting the yuan, Bolivia could strengthen its economic ties with China, potentially unlocking new trade opportunities, investment flows, and technology transfers. This could stimulate economic growth and foster development in various sectors.

At the same time, if Bolivia were to denominate trade transactions and debt in yuan, it would minimize exchange rate risks associated with fluctuations in the U.S. dollar. As China's influence on the global stage continues to grow, the yuan's stability may offer long-term benefits to Bolivia, ensuring greater predictability and reducing vulnerability to external shocks.

Finally, it may reduce dependency on the United States. Historically, Bolivia has been reliant on the US dollar, which can lead to vulnerability in the face of US monetary policy changes and economic events. Adopting the yuan would provide Bolivia with an alternative to the dollar, reducing its dependence on the United States and potentially shielding its economy from geopolitical uncertainties.

On the other side, the adoption of the yuan in place of the US dollar will increase in turn Bolivia's dependence on China's Economic Policies. Bolivia's heavy reliance on China as a trading partner could subject its economy to potential risks stemming from China's economic policies. Bolivia would need to carefully navigate China's financial regulations, trade dynamics, and possible political pressures, which may limit its economic sovereignty and policy flexibility.

In addition, transitioning from the US dollar to the yuan could introduce exchange rate volatility and uncertainty. The yuan's value is subject to influence by the Chinese government, which employs certain policies to manage its exchange rate. Bolivia would need to carefully navigate these dynamics to ensure a stable and predictable exchange rate for its businesses and citizens.

Also, it would be important to remember that compared to the US dollar, the yuan's international acceptance and convertibility are relatively limited. The dollar has established itself as the world's primary reserve currency since the Bretton Woods System was created in 1944 and has been widely accepted for international trade and transactions. Adopting the yuan may present challenges in terms of finding counterparties willing to accept it, potentially complicating trade and financial operations.

Another important consideration to take into account would be that China's dominance in global manufacturing and its potential to flood markets with cheap goods could create challenges for Bolivia's domestic industries. A surge in imports from China may disrupt local businesses and hinder Bolivia's efforts to achieve a trade balance. Careful trade policies and safeguard measures would need to be implemented to mitigate such risks.

Finally, adopting the yuan and distancing from the dollar might strain Bolivia's relations with the United States and other countries with strong ties to the dollar-dominated financial system. This shift could potentially lead to trade frictions, diplomatic tensions, and limited access to international financial markets, impacting Bolivia's ability to attract foreign investment and obtain favorable borrowing terms.

The decision for Bolivia to adopt the yuan and drop the dollar is a complex and multifaceted one. While diversifying its currency reserves and strengthening ties with China can offer economic benefits, Bolivia must carefully weigh the potential risks and challenges associated with such a transition. Prudent financial planning, thorough analysis of China's economic policies, and consideration of the broader geopolitical implications are crucial before embarking on such a significant shift. Ultimately, Bolivia must strive to strike a balance that aligns with its economic goals, trade relationships, and long-term stability.

Why is the dollar so dominant in the world economy?

To start off, the United States has one of the largest and most stable economies globally. It has a high GDP, robust financial markets, a well-developed infrastructure, and a diverse range of industries. These factors contribute to investor confidence and make the US dollar an attractive currency for international transactions.

Secondly, the US dollar holds the status of a global reserve currency. This means that central banks and international institutions around the world hold significant amounts of US dollars as part of their foreign exchange reserves. The dollar's reserve currency status provides stability and liquidity to global financial markets and facilitates international trade and investment.

Thirdly, the depth and liquidity of US financial markets, particularly in New York, play a crucial role in the dollar's dominance. The US has well-established and highly liquid markets for currencies, bonds, equities, and derivatives. This depth and liquidity make it easier for businesses and investors to transact in US dollars and hedge their currency risks.

Fourthly, the world financial system created in 1944, known as the Bretton Woods System, practically established the dollar as the currency for commerce and financial relations. Subsequently, the petrodollar system has been another factor contributing to the dollar's dominance. In the 1970s, an agreement was reached between the United States and Saudi Arabia, known as the "petrodollar arrangement." Under this system, Saudi Arabia and other oil-exporting countries agreed to price their oil in US dollars and recycle the proceeds from oil sales back into US investments and Treasury bonds. This arrangement created a strong demand for US dollars and reinforced its position as the dominant global currency. Although, it is worth mentioning that as recently as January 2023, Saudi Arabia has started accepting yuan as well.

Fifth, the widespread use of the US dollar in international transactions creates network effects and inertia. Many businesses, individuals, and governments are accustomed to using the dollar for international trade and finance. This familiarity and acceptance of the dollar further solidify its dominant position.

Finally, the political and military influence of the United States globally also plays a role in the dollar's dominance. The US has been a leading geopolitical power for decades, and its political stability, military strength, and diplomatic influence contribute to the trust and acceptance of the US dollar in international transactions.

It is important to note that while the US dollar's dominance is significant, there are ongoing discussions and developments that may gradually shift the landscape. The rise of emerging economies, such as China, and efforts to promote alternative international payment systems could potentially introduce more diversity into the global monetary system in the future.

Does the yuan have the potential to ever replace the dollar as the most important currency in the world?

Yes, the Chinese yuan (also known as the Renminbi) has the potential to pose at least a significant challenge to the US dollar, but it's important to note that it currently hasn't reached that level yet.

Among the factors supporting the argument that the yuan is capable of challenging the dollar is that China is the world's second-largest economy, and its rapid growth has boosted the importance of the yuan on the global stage. As China continues to grow and expand its influence, it could increase demand for the yuan and elevate its status as an international currency.

Also, China has been actively promoting the international use of the yuan. It has established various initiatives, such as the Belt and Road Initiative, which aims to enhance trade and investment between China and other countries. Additionally, China has established bilateral currency swap agreements with several nations, enabling trade to be conducted in yuan instead of the US dollar.

In addition, China has become a major player in global trade, with a significant portion of international transactions being conducted in yuan. As more countries trade directly with China and use the yuan for settlements, it reduces reliance on the US dollar.

Moreover, China holds the world's largest foreign exchange reserves, primarily denominated in US dollars. If China were to diversify its reserves away from the US dollar and increase its holdings of other currencies, including the yuan, it could reduce the dominance of the US dollar as a global reserve currency.

Finally, China has been working on developing its financial markets, including the Shanghai Stock Exchange and the Shenzhen Stock Exchange, to attract international investors. By creating more accessible and transparent markets, China aims to increase the global usage of the yuan for investment purposes.

Despite these factors, there are several challenges that the Yuan faces in becoming a true rival to the US dollar:

First of all, China maintains strict capital controls, which limit the free flow of capital in and out of the country. These controls hinder the yuan's convertibility and its integration into global financial systems, making it less convenient for international transactions.

Second, China's financial system is still relatively closed compared to those of developed economies. It lacks the depth, liquidity, and transparency of the US financial system, which are crucial factors for a currency to gain global acceptance.

Finally, the US dollar's status as the dominant global reserve currency is supported by various geopolitical factors. The stability of the US political system, the depth of its financial markets, and the trust in the rule of law all contribute to the widespread use of the US dollar. China's political and legal systems, as well as concerns over transparency and human rights, could present obstacles to the internationalization of the yuan.

While the Chinese Yuan has the potential to challenge the dominance of the US dollar, it still faces significant hurdles. The US dollar's long-standing position as the global reserve currency, along with the challenges of capital controls, financial reforms, and political factors, make it unlikely for the Yuan to replace the US dollar in the near term. However, as China's influence continues to grow and it implements further reforms, the Yuan could become a more substantial competitor to the US dollar in the future.

The de-dollarization process?

Arce's argument actually reflects a current effort underway, mainly the countries in the BRICS alliance, to weaken the dominance of the dollar. This process is mainly reflected in actions these countries have taken to date.

One place where the de-coupling from the US dollar is observable is the IMF's survey on the currency composition of official foreign exchange reserves (COFER) which indicates that in 2021 59% of central banks around the world versus 71% in 1999 held their reserves in US dollars. 

Kazakhstan started de-dollarizing in 2015 and redoubled its efforts in 2016 due to the challenges of inflation in that last year. 

Russia stated at the beginning of 2021 its intention to abandon the dollar to reduce the country's exposure to Western sanctions. Russia also expressed its intention to add yuan to its international reserves, the National Wealth Fund.

Egypt announced in 2022 its intention to issue bonds in yuan to diversify its sources of finance.

Myanmar also announced in 2022 it would reduce its dollar reserves to diminish its reliance on the US economy. 

In terms of trade and commerce, China started to shift in 2011 its usage of dollars to trade in favor of yuan. 

Venezuela, in 2018, started to price its oil reserves in yuan and other currencies other than the dollar. 

Russia started 2022 to sell its oil and natural gas in other currencies such as the yuan and rubles. 

Several European companies were using rubles in the second quarter of 2022 to settle payments in rubles. 

Finally, there is a range of bilateral trade agreements that stipulate the use of the two involved currencies for trade instead of the dollar. There are even a number of alternative payment systems rivaling SWIFT. For example, there is the Cross-Border Interbank Payment System (CIPS) created by the Chinese and the Instrument in Support of Trade Exchange (INSTEX) which was a special purpose vehicle created by the EU to be able to trade with Iran after the US unilaterally removed itself in 2018 from the Obama administration's agreement with Iran.