Russia therefore plays a central role in the issue as it should be noted that it has access to the Cross-Border Interbank Payment System (Cips), China’s alternative to Swift, and that last year bilateral trade between the two countries rose to a record $185 billion as Russian companies paid for most of their purchases of Chinese goods in renminbi.  Total Cips deals amounted to Rmb 97 trillion ($14 trillion) in 2022, central bank data showed, a year-on-year increase of 21 percent. China has also already begun paying in rubles and yuan, and no longer in dollars, for Russian gas supplies coming from the Siberian pipeline, the Power of Siberia.

It should also be pointed out that China’s business is not only with Russia in the energy field we need only recall what happened last month, for example, when Beijing finalized in yuan the purchase of about 65 thousand tons of liquefied natural gas imported from the United Arab Emirates, and what it has achieved with Brazil instead. Indeed, Brazil and China last March reached an agreement to pay for purchases of goods in their respective national currencies.

What is now seems certain is the internationalization of the yuan and the fact that it will continue as China intensifies its diplomacy, particularly with countries in the global South.

At the moment, however, China’s big stumbling block remains its geopolitical role vis-à-vis the United States, although the gap between the two giants is gradually shortening there remains some length between the two. Another fact to keep in mind is that its economy is not currently driven by market forces as the U.S. economy is, and in addition there is another fact to highlight, which is the transparency and reliability in the economic data provided by the Chinese authorities.Indeed, the Chinese government represents a source of political risk for foreign capital flows, which are subject to routine intervention by the Chinese central bank.

Thus, the dollar still remains crucial to global markets and reference standards, and this risks slowing the realization of the dedollarization coveted by Xi Jinping. Looking at the numbers, these in fact describe to us quite starkly how far China still has to go despite its growth; indeed, data on trade financing from Swift, the international payments and financing platform, speaks quite clearly: the yuan’s market share by value has risen from less than 2 percent in February 2022 to 4.5 percent a year later. These gains by the Chinese currency put pressure on the euro, which currently weighs in at 6 percent of value in international trade. Both the euro and the yuan, however, still account for a small fraction of the dollar’s share, which stood at 84.3 percent in February 2023, a decrease from 86.8 percent of the previous year.

The progress of the yuan as the main pivot in the international payments system in spite of the dollar and the euro is raising concerns even in the upper echelons of both the Federal Reserve and the ECB, in fact in the first person ECB Governor Christine Lagarde sounded an alarm last week during a seminar in New York. The governor in fact showed concern on the issue in that what is slowly, but not too slowly, happening could change the world balance by shifting the center of gravity of the world economy and finance from New York and Frankfurt to Beijing.

In this sense, the meeting of Luiz Inácio Lula da Silva, Brazil’s newly elected president, and Xi Jinping, president of the People’s Republic of China, was somewhat in line as described above. In fact, with last week’s visit to both Beijing and Shanghai, the Brazilian president launched a real lunge at the monetary supremacy of the dollar. The Basilian leader, back at the helm of his country, whose priorities certainly include shaking off the isolationist policy of predecessor Jair Bolsonaro, signed 15 new partnership agreements with his Chinese counterpart in different areas such as technology, energy, development and trade.

Among the understandings was one that established the direct operation of trade transactions between Brazil and China in yuan, “without the need for dollarization.” Lula also met with the president of China’s National People’s Congress, Zhao Leji, which was followed by a statement from the Brazilian president in which he expressed the hope that the two countries “will balance world geopolitics together.”

Lula therefore set himself a very clear goal: to reactivate political and economic cooperation with China while not abandoning his own relationship with the United States. Indeed, he has been able, just with Washington, to obtain from Joe Biden a 52 billion dollar investment package in the Brazilian semiconductor chain while imposing at the same time a series of restrictions on the export of chips and equipment for their production in China.

This means, summarizing to the bone, that Brazilian companies that will benefit from the U.S. fund will not have the opportunity to sign trade agreements with Beijing, over the next ten years.

Brazil, which is not leaning toward either side in this technological cold war, is interested in remaining at the center of the competition between the two different powers. So while Brazil needs the U.S. push to develop its semiconductor production, it cannot do without the Asian giant. Proof of this is enough to look at the numbers; in fact, bilateral trade between Brazil and China has grown by leaps and bounds over the past decade, reaching $150.4 billion in 2022. China is in fact buying Brazil’s agricultural and mining raw materials and has invested in the South American country’s consumer market and infrastructure sector.

Lula with the visit also turned the spotlight back on the BRICS, namely Brazil, India, China, Russia and South Africa, to which Iran and Argentina will also be added to the list of 5 member countries. The latter which has an inflation of 102.5 percent and an external debt it will probably never be able to pay off, consequently seeks friendlier shores, while Iran for its part is looking for “more reliable” partners after its expulsion from SWIFT in 2013. In fact, the meeting between the Brazilian and Chinese presidents came after an equally noteworthy event, namely the appointment of the new head of the Brics group’s banking institution, the New Development Bank, to Dilma Rousseff, economist and former president of Brazil (“dauphin” of Lula).

The presence of a high-level member of Brazilian politics in a financial institution in which China plays the role of main player strengthens the relationship between Brasilia and Beijing. Beijing, therefore, seems increasingly interested in playing a leading role in the global South and stealing the show from Moscow and Washington.  Lula for his part, at Dilma Rousseff’s inauguration event as head of the New Development Bank, also launched an attack on the International Monetary Fund for too severe spending cuts and also called on members of the BRICS and the banking institution (of which Uruguay, Bangladesh, Egypt, and the United Arab Emirates are also members) to reduce the use of U.S. dollars for international transactions and encourage the adoption of other currencies. President Lula with this statement and request of his, followed with applause from his new ally (China), has made the Chinese dream more realistic: to make the yuan, the Chinese currency, the main international trading currency in the coming years.

By Michele Brunori