Financial Services Association, January 24 (Editor Liu Rui) On Monday EST, the Atlantic Council (Atlantic Council), an American think tank, released a report saying that the Federal Reserve bears some responsibility for accelerating the major trend of de-dollarization in many countries around the world: the trend of de-dollarization is not only driven by geopolitics, but also by interest rate spreads.

According to the report, although the driving force behind the global wave of de-dollarization is often regarded as a political move taken by various countries to weaken America's dominant position in the financial order, many people may have overlooked it, and economic fundamentals have also played a role in the wave of de-dollarization.

Report authors Niels Graham and Hung Tran write: “The Fed's interest rate hike has made dollar borrowing more expensive and scarce, encouraging emerging market companies to seek an alternative to the dollar — the Chinese yuan.”

De-dollarization is accelerating

The report notes that the fluctuation in the US dollar's global dominance is not a recent phenomenon. As a reserve asset, for example, the dollar accounted for nearly 80% of global reserves in 1970; by 1980, this figure fell below 58%; then plummeted to 47% in 1990. Although the US dollar's share of global reserves recovered to around 71% in 1999, it continued to gradually decline thereafter, falling to 59% by 2020.

At the same time, due to China's expanding influence in international trade and investment and the rapid increase in bilateral cross-border payments, the use of the renminbi in international transactions is receiving more and more attention as a major challenger to the US dollar.

The share of RMB in international payments grew rapidly after the Russian-Ukrainian conflict

Last year, global payment settlements using RMB almost doubled, from 1.91% in early 2023 to 4.61% in November 2023. The report stated, “More importantly for China, currently about half of bilateral cross-border trade and investment transactions are settled in RMB, which reduces China's vulnerability to US financial sanctions.”

Of course, the think tank admits that many countries' move to switch from the US dollar to the renminbi was partly geopolitical motivated: after the Russian-Ukrainian conflict broke out, the West froze Russia's foreign exchange reserves and largely excluded them from the global financial system. This has prompted many other countries to worry about similar restrictions, thus speeding up the process of de-dollarization.

However, according to the Atlantic Council, even without considering the factors of the Russian-Ukrainian conflict, or assuming that the West does not sanction Russia, there is still a reason for emerging markets to stay away from the US dollar.

Interest spreads accelerate the process of de-dollarization

The bank said that after the Federal Reserve raised interest rates rapidly in the past two years, the Fed's interest rate level close to 0 was quickly pushed to a level of 5.25% to 5.5%, which made short-term RMB borrowing costs significantly lower than the US dollar — the first time in nearly 20 years.

At the same time, since China's inflation level is more moderate, China is able to basically keep interest rates stable, making international companies more inclined to use lower-cost renminbi debt.

Meanwhile, the Fed's interest rate hike also triggered an appreciation of the US dollar. Currently, the US dollar is still about 10% above the pre-2022 average. The Russian-Ukrainian conflict has also exacerbated the dollar's appreciation, as many people use the dollar as a safe-haven asset. The researchers said this meant that the availability of the dollar was severely limited, leading to a decline in credit for borrowers who relied on short-term dollar financing.

“Without dollar financing options as plentiful as during the 2008 financial crisis, this impact would stifle global trade. However, after the Chinese government made efforts to promote renminbi-denominated loans, businesses seeking short-term financing can now turn to RMB lenders or the RMB bond market,” the Atlantic Council wrote.

This shift means that multinational companies will be more willing to adapt to China's emerging global financial infrastructure, and the use of China's cross-border interbank payment system is growing rapidly. The think tank said that when the availability of the dollar is limited, the transaction volume of this alternative system to the SWIFT system tends to soar sharply.

Although the Federal Reserve may start a cycle of cutting interest rates this year, it is conceivable that in the context of a slow decline in inflation, the Fed's interest rate level will not fall to an ultra-low level sufficient to bring the dollar's cost advantage.

Think tank researchers predict:

“In the coming year, macroeconomic trends are likely to continue to push emerging market firms to finance trade with renminbi-denominated debt, which will expand the use of RMB in international trade.”