BRICS MOVE TO UNSEAT DOLLAR AS TRADE CURRENCY

By Thandeka Gqubule and Andile Ntingi

FIN24

Mar 25 2012 15:00

SOUTH Africa will this week take some initial steps to unseat the US dollar as the preferred worldwide currency for trade and investment in emerging economies.

Thus, the nation is expected to become party to endorsing the Chinese currency, the renminbi, as the currency of trade in emerging markets.

This means getting a renminbi-denominated bank account, in addition to a dollar account, could be an advantage for African businesses that seek to do business in the emerging markets.

The move is set to challenge the supremacy of the US dollar. This, experts say, is the latest salvo in the greatest worldwide currency war since the 1930s.

In the 1930s, several nations competitively devalued their currencies to give their domestic economies an advantage over others.

And this led to a worldwide decline in overall trade volumes at the time.

The north will be pitted against the entire south in a historic competitive currency battle ~ whose terrain has moved to the Indian capital New Dehli ~ where the Brics (Brazil, Russia, India China and South Africa) nations will assemble next week.

China seeks to find new markets for its currency and to lobby to internationalize it throughout the Brics states.

For China this is not a new game. In 2009, senior Chinese banking officials issued a statement that the international monetary system was flawed owing to an unhealthy dependence on the US dollar and called for a “super-sovereign” international reserve currency.

Experts say Beijing’s first step is to internationalize its currency (by expanding its reach beyond China), liberalize it (to allow its value to be determined by the market instead of actively managing it as they currently do) and then make it a reserve currency for many nations in the developing world.

Africa’s largest bank, Standard Bank, says in a research document: “We expect at least $100bn (about R768bn) in Sino-African trade ~ more than the total bilateral trade between China and Africa in 2010 ~ to be settled in the renminbi by 2015.”

The bank anticipates that the use of the renminbi will lower transaction costs in Africa, thus lowering the barriers to doing business.

It also says that the Chinese will be more successful in transacting in renminbi in Africa than anywhere else because most currencies are weak and somewhat localized.

Not only will the US dollar be challenged, but also the entire international financial regime ~ led by the World Bank and the International Monetary Fund ~ which has been dominant since the end of World War II.

South Africa’s place in the emerging international financial regime is set to be enhanced.

Zou Lixing, vice-president of the Institute of Research of the China Development Bank, told the Brics preparatory meeting recently that “although the economic aggregate of South Africa is small relative to the Brics, South Africa provides a gate for the Brics to get access to the huge African market”.

The five-member nations have collectively called for an end to the tacit agreement between the US and Europe that ensures that the head of the World Bank is an American citizen, and the International Monetary Fund head is European.

They have proposed that an emerging market candidate be fielded when the term of the current World Bank head, Robert Zoellick, expires in three months.

Fundacao Vargas, a member of the Brazilian delegation, said Brics could confront “existing governance structures”, and seek to strengthen the bloc's influence in established institutions like the World Bank and the International Monetary Fund, while creating alternatives.

The demand for greater political say in international affairs dovetails with China’s expected rise as a financial superpower in the next eight years.

Vargas showed the preparatory meeting projections indicating that China’s economy will have eclipsed that of the US by 2020, hence the promotion of the renminbi as the preferred currency of the south.

The renminbi has traditionally traded at a deliberately lower exchange rate, which gave a huge boost to China’s domestic economic sectors and enabled its booming industrialization and growth.

The US and other trading partners have long accused China of being a “currency manipulator”.

Last week, Brazil declared its commitment to keep its own currency ~ the real ~ low. Its Finance Minister, Guido Mantega, reiterated his November 2010 declaration that a global currency war has broken out.

He said: “We do not want to lose our manufacturing sector.

"We will not sit back and watch while other countries devalue their currencies.”

Brazil and China cried foul last year when, through a slew of initiatives dubbed QE2 ~ quantitative easing Two ~ the US indirectly devalued its currency by pumping about $600bn into its economy to protect the economy from sliding back into recession.

South African economists were in two minds about the moves to extend the influence of the renminbi.

Economist and academic Peter Draper told City Press recently that the decision to establish a Brics development bank and to enlarge the renminbi's sphere “is political and related to the current political dynamics within the World Bank” and the established international financial system.

Tom Wheeler of the South African Institute of International Affairs said developments in New Delhi (India) were “giving substance to the previously (and) loosely arranged economic bloc”.