Beijing’s ‘Bretton Woods’ remains a crude gambit
The end of World War II saw the US dollar replace both gold and the pound sterling as the basis for the international monetary system. Called Bretton Woods after its location in the US state of New Hampshire, the agreement cemented the US dollar as the world reserve currency.
Although the global edifice of fixed exchange rates collapsed after the Suez crisis, England hung on for a few more decades until US president Richard Nixon closed the convertibility of the US dollar. Bretton Woods permitted nations to exchange currencies based on a fixed rate of gold.
China seeks an identical ability to strengthen the appeal of its own currency in the hope that other Asian nations would peg local currencies to the yuan. Currently, the yuan is used in barely 2% of international payments; Beijing hopes to strengthen the appeal of its currency by introducing yuan-denominated oil contracts. In so doing, China aims to bankrupt the US by forcing Saudi Arabia to abandon its petrodollar peg.
Other nations are seeking to divorce themselves from the volatility of US currency parity. Venezuela recently launched a Bitcoin-like cryptocurrency in the hope of saving hard currency among crippling US sanctions. Russia has diversified its central-bank portfolio from dollar-denominated Treasury bonds into gold. What all these nations have in common is a desperate willingness to create an alternative to the US dollar.
March 26 saw China begin crude futures contracts in the hope of sustaining a standard for oil pricing rivaling Brent in Europe and West Texas Intermediate in the US. Domestically, Beijing sought to hedge against volatility because its domestic refiners and traders had failed to manage risks in foreign-exchange markets while seeking to evade capital controls.
Two of the world’s largest commodity trading platforms, Glencore and Trafigura, have secured accounts in yuan-denominated oil. Nevertheless, China remains a closed, managed economy, making it virtually impossible for domestic companies to trade abroad, which deters wealthy foreigners from making investments inside China.
However, nation-states that struggle to finance global oil transactions such as Russia, Venezuela and Iran would easily seek out contracts in yuan-denominated oil to wean them off dollar-based earnings and their attendant US-related banks.
The dollar’s dominance looks very secure, with nearly 60% of the world’s nation-states trading in dollar-denominated oil accounts, representin 76% of the world’s gross domestic product. The Bank for International Settlements states that the daily forex market of US$5.1 trillion is heavily weighted toward the US dollar. Even the world’s central banks own nearly two-thirds of their hard currency in dollars. Yuan-denominated transactions throughout the globe pale in comparison, at 1.2% of global transactions.
For China to secure its interests, it must drop its capital controls, and reform its current/capital account. If Beijing should continue to quarantine its political economy, it abandons the hope of strengthening the appeal of the yuan. So long as China ignores the politics of market-based exchange rates, it cannot secure its geopolitical objectives that underwrite its aim to sustain alternatives to King Dollar.