ASEAN-Economic-Outlook-2023
SINGAPORE/KUALA LUMPUR, May 21 (Agencies): The on-going hype on “de-dollarisation” is unlikely to gain serious traction among the Association of South-East Asian Nations (Asean) over a number of practical and political reasons, with analysts urging caution and restraint against moves that will increase trade complications within the bloc and its external trade partners.
The success of the dollar as the global reserve currency and the stability it has brought about cannot be understated but recently it has come under attack as China, the leading strategic competitor of the US which seeks to de-throne the Dollar and replace it with either the Yuan or a yet to be announced newly created reserve currency, said Samirul Ariff Othman, a former senior research officer with the Malaysian Institute of Economic Research (MIER).
“The fact of the matter is many countries are happy to hold and trade in Dollars as it reduces exchange rate risk since there's no need for a country to exchange its currency for the reserve currency to do trade.
“Trade using a strong, dependable and reliable currency makes sense and is likely to remain a cornerstone of Asean policy going forward. The risk that we see emerging however is a ‘forced’ de-dollarisation, with China attempting to push Asean states to conduct trade with China in Yuan. This is being done to score points against the US, not to improve the way trade is conducted,” he said.
Samirul explained that the main factor in China’s “Yuan for Asean” drive is the effectiveness of sanctions that have been imposed against Russia since the outbreak of war in Ukraine: “China sees that its trade with Asean could take a hit in the event of a conflict over Taiwan. However Asean states are not blind and realise that abandoning the Dollar opens them to even more economic coercion especially over their claims in the South China Sea.”
China will place an emphasis on Yuan currency settlements with neighbouring countries and the development of offshore centres as its next steps to promote the greater use of the Chinese currency overseas, its central bank said in 2022.
While China aims to make the Yuan the world’s reserve currency and an alternative to the Dollar, the strict control of the exchange rate by Chinese authorities makes it challenging to promote the use of Yuan.
However, the Yuan is seen to have become less attractive to foreign investors given the recent depreciation pressure and domestic economic slowdown. Large capital outflows and aggressive rate increases by the US Federal Reserve, have seen the Yuan weaken by more than 10 percent against the US dollar last year, prompting a major effort to push the Yuan into China-Asean trade.
Samirul cautioned against the “hype” over de-dollarisation adding that Asean states, rather than jump on the bandwagon are likely to cling onto the Dollar as a means of retaining leverage and sovereignty against China’s predatory trade practices.
“There is already a huge imbalance in trade between Asean and China. China has also demonstrated that it has no qualms about using economic pressure to get its way and push its agenda in Asean. Switching from the Dollar to the Yuan or any other currency dominated by China is obviously going to put Asean in an even weaker position. I foresee a pushback against attempts to settle bilateral trade in Yuan and local currencies,” he said.
He also pointed out that other countries were already running into currency oversupply problems, with Russia now having too many Rupees and Yuan and being unable to trade with the currencies beyond India and China.
Asean itself is well aware of the fact that this “trend” is largely due to geopolitical power plays by antagonists of the West, led by China and to a lesser degree Russia, who are attempting to highlight how they are settling limited transactions in local currencies, but in reality are running into difficulties, Samirul said.
Russia has billions of rupees sitting in Indian banks but acknowledged there's a problem as it looks for ways to convert that currency.
For its part India has asked banks and traders to avoid using Chinese Yuan to pay for Russian imports, showcasing just some of the problems with trade in local currencies in place of the dollar.
In its Asean briefing, Dezan Shira & Associates, a pan-Asia, multi-disciplinary professional services firm reaffirmed caution against de-dollarisation: “To be clear, the US dollar is still the dominant currency among global forex reserves, accounting for some 58 percent of the reserves in the fourth quarter of 2022.
"The Euro is second and accounts for 20 percent of global forex reserves... However, despite the slow erosion of the US dollar’s dominance, analysts say the currency will not be dethroned in the short term, mainly because there are no real alternatives.” - Agencies
