Over the first half of the year, we’ve built on several narratives that we believe are critical when it comes to understanding how the intersection of geopolitics and economics is set to shape the world going forward.
One of these narratives revolves around the extent to which three China-led ventures are set to supplant traditionally dominant supranational lenders on the way to embedding the yuan in international trade and investment.
The new ventures are the BRICS bank, the Asian Infrastructure Investment Bank, and the Silk Road Fund. We’ve discussed each of these at length and we’ve also shown that in one way or another, they all represent a shift away from the multilateral institutions that have dominated the post-war economic order.
In short, they are a response not only to the IMF’s failure to provide the world’s most important emerging economies with representation that’s commensurate with their economic clout, but also to the perceived shortcomings of the IMF and ADB. In other words, they are far more than a new foreign policy tool for Beijing to deploy on the way to cementing its status as regional hegemon.
The role of these new institutions in helping the yuan to replace the dollar as the world’s reserve currency (something which many still claim is an absurd proposition despite all evidence to the contrary) was made clear when, in April, we noted [11]that although Beijing has sought to play down the degree to which the ventures will serve to help establish a new world economic order with China at the helm, the fact that Beijing "may encourage the $100b AIIB and $40b Silk Road Fund to issue loans directly in yuan" (via Bloomberg) and the fact that "the AIIB will establish a currency basket with China set to push for the yuan to take a prominent role" (via The South China Morning Post) suggested otherwise.
Now that the AIIB and the BRICS bank have officially launched (see here [12] and here [13]) and are expected to begin operations soon, it appears that not only will the yuan play a key role for both lenders, but in fact, the two development banks may effectively merge. Here’s more via The BRICS Post [14]:
The BRICS New Development Bank will name its first investment in April next year and the first loan will be issued in yuan not dollar, top officials confirmed.
The first president of the Bank, Kundapur Vaman Kamath said in Shanghai that the new lender will work closely with the China-led Asian Infrastructure Investment Bank.
"We have partnerships that we will forge with the AIIB, the national loan banks and indeed, the existing market loan banks," he said.
The NDB with about $50 billion in capital to invest in public infrastructure will compete with institutions where the US has considerably more influence—organizations such as the World Bank and the International Monetary Fund.
The paid-in reserves are planned to be denominated in each country’s currency. The Chinese renmimbi is also expected to replace the dollar at the BRICS Bank, especially for projects in Asia.
And that is your de-dollarization du jour. While the IMF (and by extension, Washington) bickers with Berlin about just what went wrong with Greece's first two bailouts and whether or not the third iteration is feasible without massive writedowns, the world's new multilateral institutions are busy planning to make development loans in yuan. We'll close with the following quote from Nomura's Richard Koo:
It is difficult to say at this point whether the AIIB will have a negative or a positive impact on the global economy. At the very least, however, the emergence of an international institution with a viewpoint different from that of western creditors will help enhance the quality of debate over emerging economies’ debt problems.
