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Will Asia pioneer the “de-dollarization” process?

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Denmark-based Saxo Bank has released a new batch of “outrageous” predictions for 2020 that it believes could potentially destabilize the entire international system existing today. The bank’s experts predict, among other things, that in the coming year, the Asian Infrastructure Investment Bank (AIIB) may launch “a new reserve asset, called the Asian Drawing Right, or ADR, with 1 ADR equivalent to 2 US dollars, making the ADR the world’s largest currency unit.”

Blockchain technology will give the ADR additional reliability and ensure maximum transparency of payments effectively making it a conventional unit in a basket of leading world currencies and gold, with the Chinese yuan heavily prominent in the mix and the US dollar weighted at below 20 percent. 

According to the Danish bank, this step is clearly aimed at de-dollarizing regional trade. Local economies will multilaterally agree to begin conducting all trade in the region in ADRs only, with major oil exporters Russia and the OPEC nations happy to sign up on their growing reliance on the Asian market.

The ADR will quickly take a sizable chunk of global trade away from the US dollar, leaving the United States ever shorter of the inflows it needs to fund its double-digit deficits. The US dollar will lose 20 percent against the ADR within months and 30 percent against gold.

By the close of the 1990s, Southeast Asian countries had started coming forward as the main competitors for US companies with local political and economic elites getting increasingly wary of the imbalances of the “unipolar model of globalization” where capital continues to accumulate mainly in countries issuing world reserve currencies. It looks like the world’s leading powers now have in mind the scenario of a possible collapse of the modern world order. The policy of sanctions and financial and economic pressure, which has recently been pursued by Washington raises the prospects of a financial system or systems being created that would be independent of the United States. In Asia and Eurasia, new political alliances are emerging, including in the form of region-wide financial institutions.

The processes currently unfolding in the financial and economic life of Asia and elsewhere in the world, are in large part associated with the trade war that has been going on between the United States and China for the past few years, taking in ever new trade and economic sectors and now threatening to spill over into the sphere of finance as well. Still, the scope of this rivalry has not yet reached a Cold War level. In fact, Saxo Bank predicts an escalation of the US-China trade war to a level typical of the Great Depression era. If this is what is going to happen, the US dollar, this symbol of US dominance in the global financial system, may effectively be weaponized to undermine the development potential of any outside rivals, China included, who would no longer be able to make financial settlements, receive and issue loans, and finance their existing obligations. And all this without any immediate threat of the use of military force. One possible way of avoiding this scenario would be to create a regional reserve currency not directly dependent on either the US dollar or the Chinese yuan.

Another major factor in the evolution of the financial architecture of Asia is that China, now the world’s second biggest economy, wants to be able to “better defend its economic interests and influence decision-making processes pertaining to global economic development.” To this end, Beijing “needs to participate in international institutions where its voice will carry decisive weight.” The creation of AIIB in 2014, where half of the bank’s capital currently belongs to Beijing, was just one step in this direction. Many experts believe that China wields an unofficial veto right in the Bank’s key decisions. However, as noted by Professor A. Kuznetsov, official Beijing keeps insisting that “newly created institutions present competition, not an alternative,” to the IMF and the World Bank.

Overall, the Asian reserve currency’s prospects depend on how regional and global financial and economic trends are perceived by the major global economies. Ever since the emergence of the global money concept, there has been only one leading world currency in use: first the Dutch guilder, then the British pound and later the US dollar. Right now, expert opinions relevant to the dynamics of the US dollar’s share in the global currency vary significantly. According to a European Central Bank report released in June 2019, “the US dollar remains the world reserve currency, but its predominance has been significantly shaken.” This trend towards a diversification of reserves and a year-on-year contraction of the US dollar’s share in the world central banks’ reserves is likewise acknowledged by a review of global trends released by the International Monetary Fund. The greenback is gradually being replaced by the euro, the Japanese yen and the Chinese yuan. There are more and more payment mechanisms independent of the United States popping up, with The Economist writing about China working hard to create its own international payment system based on the yuan. There has also been talk about China paying in yuan for its Iranian oil imports.

Is all this enough to predicate the emergence of an alternative payment system though? The US dollar still accounts for a significant share of investment and global trade, including in oil, natural gas and metals. There are at least three factors still preventing the yuan from becoming a world currency: the high cost of “financial transactions associated with the receipt and distribution of information”; “China’s overdependence on Hong Kong as a regional offshore financial center,” and the People’s Republic’s inability “to exert political influence on other world economic centers, mainly  the US and the EU.” There are still four factors testifying to the yuan’s increasing value as a regional currency: the projected “growth of the Asian countries’ incomes” leading to “an increase in demand for Chinese goods”; “the implementation of multilateral projects as part of the “One Belt, One Road” initiative, resulting in increased yuan usage in the countries of Central and Southeast Asia”; “The development of the Asian bond market leading to the standardization of international debt in RMB”; “increased demand for RMB by commercial banks and enterprises as part of the Multilateral Initiative to conduct swap operations between central banks.”  

Finally, the process of the yuan’s “internationalization” is slowed down by the Chinese authorities’ need to maintain short-term growth, while simultaneously countering “adverse external shocks.”

Well, at the end of the day the global financial system may “naturally” break up into several relatively independent currency zones: the dollar, the euro and the yuan (or yen). In future, the world may likewise rest on a similar balance of power. However, these currency zones will inevitably find themselves competing among themselves, which will be a test of strength for all currency macro-regions. At the same time, the countries of the Asia-Pacific region will face a hard choice. As recently as the dawn of this century, uniting around the Japanese yen was seen by most of them as the most logical option. Now that the People’s Republic of China has turned into a regional economic powerhouse and the world’s second economy, the need for closer interaction between the economies of the Asia-Pacific region and the Chinese yuan is becoming increasingly evident. Meanwhile, the low level of mutual trust between a number of leading Asian countries and China may become a hurdle on the way of creating a common reserve currency.

Finally, the past 3-4 years have seen a slowdown in China’s economic growth, which, in turn, could drive down commodity prices worldwide. As a result, raw materials exporters, including Russia and Saudi Arabia, whose budget deficit this year exceeds four percent of GDP, will find themselves on the losing end. Meanwhile, China and Saudi Arabia account for a significant part of the US public debt. Faced with mounting economic woes, Beijing and Riyadh might be forced, together or separately, to start selling US government bonds, “which will inevitably send their value into a tailspin,” with a knock-on effect in the financial markets and the bankruptcy of a number of leading financial institutions. Such a course of events may be fraught with a new financial meltdown.

An “end of the dollar’s dominance” for any other reasons, including a “sudden” emergence of a very strong alternative reserve currency, would  “result, first and foremost, in a large-scale economic crisis in the People’s Republic,” “a collapse of oil prices” and a quick slump in “economic activity around the globe.”. Therefore, China, as a founding member of the AIIB, which Saxo Bank calls the potential issuer of ADR, is hardly interested in a depreciation of the US dollar.

One should also bear in mind the fact that all leading EU countries, including Britain, Germany, Italy and France, happen to be members of the AIIB. Therefore it can be assumed that Europeans, who are intent on strengthening the euro’s global standing, may not be all too happy about  the prospect of a new reserve currency coming along that could challenge  not only the dollar, but the single European currency as well.

Although the emerging economies’ share in global savings is currently close to 50 percent, “this money keeps flowing, via international reservation channels, into the Anglo-Saxon center of the global financial system, with limited possibilities for its productive placement.”

The current model of globalization is losing momentum too. This can somewhat reduce frustration with development imbalances, but per se it will hardly be able to correct the overall structural imbalances of the global economy. Economists warn about the dangers of creating a system of payments alternative to the dollar, which could bring about exchange rate fluctuations and a chaotic “capital spillovers” from one reserve currency to another and back. One thing is clear: the harder Washington tries to destroy the established “rules of the game,” the louder the calls for the creation of global or regional financial systems alternative to the dollar will get. However, the creation of such systems will require large-scale and lengthy political and organizational efforts, while the price tag will be prohibitively high too. Therefore, it is highly unlikely that anyone will venture to predict exactly when this is going to happen.

From our partner International Affairs

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Economy

China Development Bank could be a climate bank

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China Development Bank (CDB) has an opportunity to become the world’s most important climate bank, driving the transition to the low-carbon economy.

CDB supports Chinese investments globally, often in heavily emitting sectors. Some 70% of global CO2 emissions come from the buildings, transport and energy sectors, which are all strongly linked to infrastructure investment. The rules applied by development finance institutions like CBD when making funding decisions on infrastructure projects can therefore set the framework for cutting carbon emissions.

CDB is a major financer of China’s Belt and Road Initiative, the world’s most ambitious infrastructure scheme. It is the biggest policy bank in the world with approximately US$2.3 trillion in assets – more than the $1.5 trillion of all the other development banks combined.

Partly as a consequence of its size, CDB is also the biggest green project financer of the major development banks, deploying US$137.2 billion in climate finance in 2017; almost ten times more than the World Bank.

This huge investment in climate-friendly projects is overshadowed by the bank’s continued investment in coal. In 2016 and 2017, it invested about three times more in coal projects than in clean energy.

The bank’s scale makes its promotion of green projects particularly significant. Moreover, it has committed to align with the Paris Agreement as part of the International Development Finance Club. It is also part of the initiative developing Green Investment Principles along the BRI.

This progress is laudable but CDB must act quickly if it is to meet the Chinese government’s official vision of a sustainable BRI and align itself with the Paris target of limiting global average temperature rise to 2C.

What does best practice look like?

In its latest report, the climate change think-tank E3G has identified several areas where CDB could improve, with transparency high on the list.

The report assesses the alignment of six Asian development finance institutions with the Paris Agreement. Some are shifting away from fossil fuels. The ADB (Asian Development Bank) has excluded development finance for oil exploration and has not financed a coal project since 2013, while the AIIB (Asian Infrastructure Investment Bank) has stated it has no coal projects in its direct finance pipeline. The World Bank has excluded all upstream oil and gas financing.

In contrast, CDB’s policies on financing fossil fuel projects remain opaque. A commitment to end all coal finance would signal the bank is taking steps to align its financing activities with President Xi Jinping’s high-profile pledge that the BRI would be “open, green and clean”, made at the second Belt and Road Forum in Beijing in April 2019.

CDB should also detail how its “green growth” vision will translate into operational decisions. Producing a climate-change strategy would set out how the bank’s sectoral strategies will align with its core value of green growth.

CDB already accounts for emissions from projects financed by green bonds. It should extend this practice to all financing activities. The major development banks have already developed a harmonised approach to account for greenhouse gas emissions, which could be a starting point for CDB.

Lastly, CDB should integrate climate risks into lending activities and country risk analysis.

One of the key functions of development finance institutions is to mobilise private finance. CDB has been successful in this respect, for example providing long-term capital to develop the domestic solar industry. This was one of the main drivers lowering solar costs by 80% between 2009-2015.

However, the extent to which CDB has been successful in mobilising capital outside China has been more limited; in 2017, almost 98% of net loans were on the Chinese mainland. If CDB can repeat its success in mobilising capital into green industries in BRI countries, it will play a key role in driving the zero-carbon and resilient transition.

From our partner chinadialogue.net

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Oil-Rich Azerbaijan Takes Lead in Green Economy

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Now that the heat and dust of Azerbaijan’s parliamentary election on February 9thhas settled, a new generation of administrators are focusing on accelerating the pace of reforms under President Ilham Aliyev, who has ambitious plans to further modernise its economy and diversify its energy sources.

Oil and gas account for about 95 percent of Azerbaijan’s exports and 75 percent of government revenue, with the hydrocarbon sector alone generating about 40 percent of the country’s economic activity. Apart from providing oil to Europe, Azerbaijan successfully completed the Trans-Anatolian Natural Gas Pipeline (TANAP) with Turkey in November 2019 to transfer Azerbaijani gas to Europe.

Yet, with an eye on the future, the country has also begun to take huge strides in renewable energy. Solar and wind power projects have been installed, with their share in total electricity generation already reaching 17 percent. By 2030, this figure is expected to hit 30 percent.

Solar power plants currently operate in Gobustan and Samukh, as well as in the Pirallahi, Surahani and Sahil settlements in Baku.

The potential of renewable energy sources in Azerbaijan is over 25,300 megawatts, which allows generating 62.8 billion kilowatt-hours of electricity per year. Most of this potential comes from solar energy, which is estimated at 5,000 megawatts. Wind energy accounts for 4,500 megawatts, biomass is estimated at 1,500 megawatts, and geothermal energy at 800 megawatts.

President Aliyev has supported the drive for renewable energy. He signed a decree in 2019 to establish a commission for implementing and coordinating test projects for the construction of solar and wind power plants.

Azerbaijan’s focus on renewable energy has drawn interest from its European partners, with leading French companies seeking to invest in the country’s solar and wind electricity generation.

Azerbaijan is France’s main economic and trade partner in the South Caucasus. According to French ambassador Zacharie Gross, “the French Development Agency is ready to invest in Azerbaijan’s green projects, such as solid waste management. This would allow using new cleaner technologies to reduce solid waste. This is beneficial for the environment and the local population.”

“I believe that one of the areas that have greatest development potential is urban services sector. An improved water distribution system can reduce the amount of water consumed, improve its quality, and also solve the problem of flood waters in winter,” the French ambassador added.

Azerbaijan is currently a low emitter of greenhouse gases that contribute to climate change. According to the European Commission, the country released 34.7 million tons of CO2 into the atmosphere in 2018, i.e. just 3.5 tons per capita. This is lower than the norm adopted by the world: 4.9 tons.

In contrast, in 2018 Kazakhstan generated 309.2 million tons of CO2, Ukraine generated 196.8 million tons,Uzbekistan101.8 million tons, and Belarus 64.2 million tons.

And the amount of carbon dioxide emitted by Azerbaijan has been consistently falling. In 1990, Azerbaijan emitted 73.3 million tons, but in 2018 this had dropped to 34.7 million tons. By 2030 the country plans to reduce its annual greenhouse gases emissions by a further 35 percent.

Measures taken by the government include the early introduction of Euro-4 fuel standards in Azerbaijan, with A-5 standards to be introduced from 2021. An increasing number of electric buses and taxis are now transporting passengers in the main cities.

Another key step is the clean-up of the environmental degradation caused by over 150 years of oil production. Azerbaijan’s state oil company SOCAR is helping to recover oil-contaminated lands in Absheron Peninsula, particularly in the once critically contaminated area around Boyukshor Lake. This involves the removal of millions of cubic metres of soil contaminated with oil.

Azerbaijan is also reducing the amount of gas it wastes in flaring. In a study funded by the European Commission, Azerbaijan ranks first among 10 countries exporting oil to the EU in the effective utilisation of associated petroleum gas.The emission of associated gases decreased by 282.5 million cubic meters from 2009 through till 2015. This is expected to fall further to 95 million cubic meters by 2022.

The government is also encouraging large-scale greening of the land. In December 2019, a mass tree-planting campaign was initiated by First Vice President Mehriban Aliyeva to celebrate the 650thanniversary of famous Azerbaijani poet Imadeddin Nasimi. 650,000 trees were planted nationwide, including 12,000 seedlings that were delivered by ship to Chilov Island.

A 2018 survey, carried out in cooperation with Turkish specialists, found that forest area is 1.2 million square meters in Azerbaijan, i.e. 11.4 percent of the total area of ​​the country.A new requirement was introduced last year to halt deforestation and to reduce the negative impact of business projects on the environment.

For a country with the 20th largest oil reserves in the world, Azerbaijan could well have chosen to stick to a hydrocarbon future. But it has instead dared to think beyond oil and gas in its energy, transportation, economy and environment. The country is setting a template that should inspire other large oil producers to emulate.

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China-US: How Long Will the Phase One Agreement Hold?

Osama Rizvi

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Although the recently signed Phase One agreement between the US and China has put a halt to the ongoing trade war between the two global economic superpowers, it cannot be viewed as a long-term solution. At its best, it is a temporary truce. The language of the eighty-six page document, including its ambiguities and the unrealistic promises upon which the entire agreement is based, suggests that it is based on two unreconcilable compromises between the two parties.

Some of the main highlights of the deal include: China must give an action plan on “strengthening intellectual property protection” and it must reduce the  pressure on international companies for “technology transfer.” China has promised to increase the purchase of goods and services from US by $200 Billion over two years. Other key points include easy access to Chinese markets. The 15th December tariffs of $160 Billion have been delayed in December 2019. Tariff rates on $120 bn of goods (imposed on September 01, 2019) have been reduced from 15 to 7 percent although tariffs of $250 Billion at a rate of 25 percent will remain.

The 86 page document, when analyzed, displays an ambiguity in its language, as well as the absence of any enforcement plan and dispute settlement process. Therefore, whenever an issue might arise (and it will) there is a likelihood the deal may implode. For instance, whilst mentioning enforcement of payment of penalties and other fines, the word “expeditious” remains unclear. What is the time period and how will enforcement be accomplished? At another point, while referring to China to send a case for criminal enforcement the word “reasonable suspicion” which can be based on “articulable facts” makes it very abstract. Chad Brown, a trade expert in an article for Business Insider, says that there is no specific way mentioned in the document to penalize the party who violates any provision. Moreover, there is no body (like WTO) that will take decisions but is rather left to the USTR and discussions with Chinese counterparts – a recipe for confusion.

Then there are the promises. But we have to consider different variables. But if it turns out that China carries out its promise to buy crude oil, LNG and coal, the global commodity markets will feel the heat – in a negative way. Under the agreement China will buy an additional $52 bn of energy products in the span of coming two years- 418.5 Billion in 2018 and $33.9 in 2021. This year China will have to buy about $27 Billion energy purchases from U.S. To put this in context, China imported 14 million barrels of oil in November 2018 which is its highest ever. Assuming that China buys the same amount for 12 months it would yield only $9 to $10 billion in revenue! In a similar calculation for coal and LNG, Clyde Russell, in an article for Reuters, concludes that in order to fulfill the above target (of $27 Billion) China would have to double the amount of these imports from US!

Moreover, the Phase One agreement has a snapback clause which implies that upon quarterly reviews if the Chinese side isn’t holding true to their promises the agreement can become null and void.

Even if China fulfills its promise, the purpose wouldn’t be served:  the US. deficit won’t reduce significantly.  The US trade deficit with China for the first 10 months of 2019 was $294 Billion – in other words, roughly 40 percent of the country’s total trade gap. However, for the same period, Chinese sold goods more than four times that amount (or about $382 bn). China will need to half its exports to the U.S. for a “meaningful” drop in the deficit – something that seems highly unlikely.

Also, the US might even end up more dependent on China. Increased demand for US oil will spike its prices and might trigger other suppliers of China to increase their output in order to fight for the market share. The global energy and commodity markets could face disruption. Similarly, Brazil and other countries, beneficiaries of this trade war, can decrease soy bean prices in order to retain their market share, giving farmers in the US a tough time.

As the U.S. Treasury Secretary, Steven Mnuchin, said that tariffs can remain in place even after a Phase Two agreement, we, therefore, have to be patient and observe the trajectory of Phase One trade agreement carefully.  Chinese promise of $200 bn purchases, the lack of a proper dispute resolution mechanism and technical loopholes in language puts the future of the agreement in doubt.

Both sides are keeping some cards in their deck; we have yet to witness the end of this trade-war saga.

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