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China Pushes De-Dollarization With Gold, Currency Swap Deal

Advancing global de-dollarization, China’s central bank is boosting its gold reserves while signing currency swap deals in yuan with countries like Argentina, encouraging the use of renminbi instead of US dollars.

NOTE: Ben Norton announces that Multipolarista has evolved and expanded into Geopolitical Economy Report, a new independent media outlet that provides original journalism and analysis on international politics and economics.

China’s central bank has taken a series of steps to accelerate the global drive toward de-dollarization, challenging the hegemony of the greenback.

The People’s Bank of China is increasing the share of gold in its foreign-exchange holdings, bucking the US dollar, which has for decades been dominant in reserves.

This January, China also signed an agreement with Argentina’s central bank for a currency swap deal, in which Beijing will provide 130 billion Chinese yuan (roughly $19 billion USD) to help Buenos Aires stabilize its currency and economy.

The South American nation said it is “committed to deepen the use of the RMB [renminbi] in the Argentine market for bilateral exchange”. (Renminbi is the official name for the Chinese currency, also known as the yuan.)

These moves show how China is responding to the new cold war that the United States is waging against it.

Concerned that the aggressive sanctions that Washington has already imposed could expand into an all-out economic war, Beijing is decreasing its holdings of dollars in reserves and encouraging the use of its currency in trade with other nations – chipping away at the global reserve currency.

Meanwhile, Russia’s central bank has pledged to buy yuan in the foreign-exchange market to hold in its reserves. And Beijing is already buying oil from Moscow in its currency.

China’s Central Bank Increases Its Gold Reserves

In December 2022, the People’s Bank of China publicly disclosed for the first time in three years that it was increasing the share of gold in its foreign-exchange reserves.

Bloomberg noted at the time that “China’s purchases may be part of a plan to diversify its reserves away from the dollar” – a virtual certainty.

In January 2023, Bloomberg followed up indicating that the People’s Bank of China had again boosted its gold reserves.

The media outlet speculated that Russia is filling its reserves with gold as well.

China and Russia are not alone. Bloomberg reported that central banks around the world are buying gold, reaching a record of close to 400 tons in the third fiscal quarter of 2022, compared to 241 tons in the same period in 2018.

Central banks in many countries are increasingly worried that they could be targeted by unilateral Western sanctions.

The United States and European Union have frozen or seized hundreds of billions of dollars and euros from the foreign reserves belonging to the central banks of Russia, Iran, Venezuela, and Afghanistan.

This has pushed many nations to look into diversifying their foreign reserves – not only governments targeted by the West for regime change, but even long-time allies such as Saudi Arabia, Egypt, and Türkiye.

The US-dominated International Monetary Fund (IMF) warned in a March 2022 research paper of the “stealth erosion of dollar dominance“.

The financial institution observed a marked rise in the use of “nontraditional currencies” in global central bank reserves. The Chinese yuan has driven this increase.

From 2000 to 2021, the percentage of foreign reserves held in US dollars dropped from a bit over 70% to just under 60%.

Thus far, the shift has been slow. But as the United States escalates its new cold war on China, the ensuing geopolitical conflict is likely to accelerate the move toward de-dollarization.

Chinese And Argentine Central Banks Sign Yuan Currency Swap Deal

Argentina has struggled for centuries with odious debt owed to colonial and neo-colonial powers.

Today, the South American nation is trapped in $44 billion in dollar-denominated debt with the IMF.

Seeking to fortify its sovereignty and weaken US control, Argentina has strengthened its relations with China and Russia.

China is already Argentina’s second-biggest trade partner, after Brazil, and the ties between the countries are growing.

In February 2022, Buenos Aires joined Beijing’s massive global infrastructure project, the Belt and Road Initiative.

This January 8, the president of Argentina’s central bank met with his counterpart from China.

The Argentine central bank reported that the two countries “committed to deepen the use of the RMB [renminbi] in the Argentine market for bilateral exchange”.

The swap offers 130 billion in Chinese yuan (roughly $19 billion USD), with an additional “special activation” of 35 billion yuan (approximately $5 billion USD) for interventions in the foreign-exchange market.

If a company in a country like Argentina needs dollars, or if a bank needs foreign currency for a loan, these firms normally would buy it on the foreign-exchange market. In contrast, swap lines cut out the middleman and create direct relationships between the central banks of countries.

In December, the Wall Street Journal reported that Beijing’s central bank is using an “unusual channel”: “currency-swap lines to support governments that borrowed heavily from Chinese banks”.

The People’s Bank of China (PBOC) has given hundreds of billions of dollars worth of yuan to dozens of countries in exchange for their domestic currencies, the newspaper reported.

Among these recipients are Pakistan, Sri Lanka, Argentina, and Laos — all nations that struggle with external debt, much of it denominated in US dollars.

The Wall Street Journal explained, “By replenishing other countries’ reserves, the PBOC may be helping some of the world’s most indebted countries avoid rising borrowing costs”.

While the newspaper portrayed this as a cynical effort by China to “prop up” members of its Belt and Road Initiative, the media outlet acknowledged that Beijing is also using the currency swaps to accelerate the de-dollarization of the international financial system.

“The PBOC says the swap lines are there to help grease the wheels of international trade, ensure financial stability and further the adoption of the yuan in a world where trade and finance are dominated by the U.S. dollar”, the Wall Street Journal wrote.

It added: “The PBOC’s swap network is the largest of its kind, according to the World Bank. The PBOC said in a 2021 report that it has swap facilities with 40 countries with a combined capacity of almost 4 trillion yuan, or about $570 billion”.

Argentina And Brazil Deepen Economic Integration, With Eyes On New Latin American Currency

While Buenos Aires is collaborating more closely with Beijing (its second-largest trading partner), Argentina has simultaneously pushed for stronger ties with Brazil (its largest trading partner) and economic integration of Latin America.

Brazil’s left-wing President Lula da Silva returned to power on January 1.

Two days later, Argentina’s Ambassador Daniel Scioli met with Brazil’s Economic Minister Fernando Haddad.

Scioli said his government’s top priority was “the agreement on deep Argentina-Brazil integration” that the countries’ Presidents Alberto Fernández and Lula da Silva are due to sign at the summit of the Community of Latin American and Caribbean States (CELAC) in Buenos Aires on January 24.

The Argentine ambassador likewise revealed that his government is in talks with the state-owned Brazilian Development Bank to receive financing to advance construction of a pipeline, named after former President Néstor Kirchner, which will provide a steady supply of gas to Brazil.

Argentina has the world’s second-biggest reserves of shale gas and the forth-biggest of shale oil.

Scioli added that Argentina and Brazil look to increase their exports and trade with each other, “conserving the reserves of both countries in the framework of the system of local currencies”.

Scioli’s hint that Argentine-Brazilian trade will be done with local currencies led to international speculation that the countries are moving forward with Lula’s proposed plan to create a sovereign Latin American currency for regional trade.

This frightened some foreign investors, and was reported in the financial press with a heavy dose of concern – and condescension.

Haddad downplayed the reports, saying, “There is no proposal for one currency for Mercosur”. But his words were careful: The Brazilian economic minister said there was not yet a proposal; he didn’t deny that the potential currency was discussed.

It was likely that Haddad was merely trying to reassure foreign investors.

In his inauguration speech, Lula pledged more robust social spending to fight poverty and hunger and vowed to reverse the privatizations carried out by previous far-right President Jair Bolsonaro.

These policies are overwhelmingly popular among the Brazilian people, but they scared some investors in Brazilian stocks, who sold off shares, leading to market instability and a slight drop in the value of the country’s currency, the real, against the dollar.

In the mean time, Brazil’s new government, like that of Argentina, has vowed to deepen its alliance with China.

On the day after his inauguration, Lula met with China’s Vice President Wang Qishan. The statesman gave the Brazilian leader a letter from President Xi Jinping, which called to boost Chinese-Brazilian ties.

Lula tweeted, “China is our biggest trading partner, and we can even further expand the relations between our countries”.

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