There has been considerable discussion about a new BRICS (Brazil, Russia, India, China and South Africa) currency that could challenge the US dollar as the world’s reserve currency or, at the very least, provide an alternative.
A BRICS currency might never happen and would require China to undergo enormous financial liberalisation, says Nicky Weimar, the chief economist at Nedbank.
There has been considerable discussion about a new BRICS (Brazil, Russia, India, China and South Africa) currency that could challenge the US dollar as the world’s reserve currency or, at the very least, provide an alternative.
This comes as South Africa’s ruling party, the ANC, earlier this month confirmed that the upcoming BRICS Summit will discuss the proposal of a common currency between the global south countries as part of “de-dollarisation” and strengthening trade.
The official announcement is expected to be made during the BRICS Summit in August in Johannesburg, but the development of the currency could take years.
Weimar explained BRICS was aiming to establish a reserve currency equivalent in strength to the US dollar and reduce the exposure to the US dollar.
But to do that, “you need foreign exchange reserves and you need the trust of the investment community”.
She said what made the dollar the global reserve currency was that the US had got the might of the US Federal Reserve behind it, which the market trusted.
“The US has never defaulted on its debt. It’s given many people scary moments, but it’s never actually defaulted on its debt. The same cannot be said for any of the countries in the BRICS grouping. That’s the first problem,” Weimar said.
The second problem was the only country in BRICS to carry such a reserve currency was China.
“But China has capital controls. You cannot have a reserve currency if you have capital controls. So China in order to make this possible would have to undergo enormous financial liberalisation if they really want to compete with the dollar,” she said.
“They also can’t do it and then change course. They would have to do it and stick with it to gain the trust of the investor. So this is miles away because, ultimately, you must gain the trust of the investor. A currency only has value if people believe it has value. And that trust has got to be there. So they’ve got a long journey ahead of them,” Weimar said.
She said China had the ability to do this, but the country would have to implement huge changes.
“I don’t actually see them talking along those lines. It’s almost like they haven’t made that connection yet that you need to let go of some of the control. You also need to always be willing to provide it.
“When Covid struck, the US Fed had to come in and say ‘we will print them and we will provide them’. And that is what China would have to do if they truly want to compete. And I’m not convinced that they made that connection yet,” Weimer said.
Chief investment officer at PSG Wealth, Adriaan Pask, recently said that deciding on and implementing a BRICS reserve currency was very far from straightforward, despite the significance of these structural “pain points” for the BRICS countries.
“The BRICS countries exhibit notable variations in their policy deployment, GDP generation, currency management, interest rates, and inflation policies. Achieving the required level of integration would be exceedingly complex,” Pask said.
– BUSINESS REPORT
