Technology, not geopolitics, may recast the world monetary order
Commentators predicted drastic alterations in the global financial and banking system when the US and its G7 allies enforced sanctions against Russia’s central bank and prohibited Western financial organizations from transacting with entities in Russia. This was seen as a further step toward utilizing finance as a tool of warfare by the West. Governments and central banks started decreasing their dependence on the US dollar, US banks, and SWIFT, which is controlled by the US, in anticipation of possible sanctions in the future.
These predictions suggested that China would be the main gainer. China has tried to stay out of the conflict between Russia and the West. The country has developed a cross-border interbank payment system to facilitate renminbi settlement and provide a substitute for Fedwire and the Clearing House Interbank Payment System (Chips), which are used to make dollar payments.
At present, 14% of Russia’s exports are funded by the renminbi. Its sovereign wealth fund has equipped itself to the tune of $45 billion with renminbi deposits and securities, while Russian enterprises issued bonds denominated in the currency to a total sum of $7 billion last year. It is evident why Russia may have felt encouraged to do that. But what other nations will be spurred into taking similar action? Reports suggested that the Saudis were willing to accept payment for oil exports in the renminbi when Chinese President Xi Jinping visited Saudi Arabia late last year. Moreover, China concluded agreements with Argentina, Brazil, and Pakistan for clearing transactions involving Chinese currency. Iraq’s central bank recently declared its intention to enable direct payments with China through settlings in the renminbi as well.
There is no evidence of a wider shift in the renminbi’s role in international foreign exchange reserves, according to the International Monetary Fund. Moreover, less than 2% of Swift instructions for cross-border interbank payments are sent in renminbi, measured by value.
There is no doubt that not all nations disclose the breakdown of their foreign reserves in currencies, and those that are most concerned with sanctions are also the least likely to do so. They tend to arrange cross-border transfers via old-fashioned methods, such as email, telephone, and fax, rather than Swift’s electronic messaging service.
Despite exceptions like Russia, there are also reasons to believe that China only has a limited financial gravitational pull. As a result of US complaints that China may be helping Russia with military hardware, Beijing may face secondary sanctions; in that case, Chinese banks would have little to no opportunity to conduct cross-border business.
Furthermore, the Chinese government has frequently shifted its stance on the private sector. It suggests that it might alter access conditions for foreign central banks holding reserves in Shanghai as well as commercial banks looking to transfer money through its cross-border payment system. Thanks to China’s capital controls and Xi’s concentration of power, such changes are possible.
Other than China, nations in Asia – and beyond – have adopted innovative techniques for cross-border payments. The recent link between Singapore and Thailand’s real-time payment systems, PayNow and PromptPay, has enabled customers of participating banks to transfer money using only their mobile numbers. Additionally, the Bank Negara Malaysia and the Bank of Thailand have extended a ringgit-baht direct settlement framework that allows Malaysians and Thais to send payments through commercial banks. To reduce reliance on either the dollar or renminbi for international transfers, five central banks in Southeast Asia also agreed to connect their fast payment systems. To further this cause, Indonesia established a Local Currency Settlement Task Force during its G20 presidency that identifies regulatory changes required to support this practice.
Diversifying foreign reserves away from the dollar has, generally speaking, not resulted in a shift in favor of the renminbi but rather towards the Korean won, Singapore dollar, Swedish krona, Norwegian krone, and other unconventional reserve currencies.
One of the most important impacts of technological advances has been on the international currency market. Payment systems such as PayNow and PromptPay are digital-based, making it easier to transfer money without relying on dollars or renminbi. This has been further enhanced by the emergence of digital foreign currency platforms with automated market-making and liquidity-provision algorithms, which make it simpler and cheaper to hold and trade these currencies outside their originating countries. This increased accessibility has made them more desirable for use as a form of an exchange or to store value abroad.
While geopolitics is expected to reshape the world’s financial and monetary system in China’s favor, technology could ultimately change that order.