Pozsar’s Warning Of Dollar’s Waning Sway Comes True

By Ye Xie, Bloomberg Markets Live reporter and strategist

In a quick succession this week, Beijing unveiled ground-breaking deals to further its efforts to promote the yuan and ditch the US dollar. It’s the kind of thing money-market guru Zoltan Pozsar had in mind when he warned that the dollar’s centrality in the world financial system is slowly being whittled away.  

What occurred in Beijing this week was easy to overlook, but it could just as easily have a place in future history books. On Wednesday, Banco BOCOM BBM became the first Latin American bank to sign up as a direct participant in CIPS, a Chinese alternative to the US-dominated global payment system. The two countries also agreed to settle trade in their own currencies.

Earlier this week, Saudi Aramco agreed to buy a stake in Rongsheng Petrochemical, one of China’s refining giants, in its biggest-ever foreign acquisition to expand its presence in the world’s biggest energy importer. A day later, China National Offshore Oil Corporation and France’s TotalEnergies completed China’s first yuan-settled liquefied-natural-gas trade through the Shanghai Petroleum and Natural Gas Exchange.

These developments followed an earlier warning by Pozsar, a former Fed and US Treasury Department official, that we could be witnessing the dusk for the petro-dollar and the dawn of the “petro-yuan.” He flagged the so-called BRICS — Brazil, Russia, India, China and South Africa — in particular in an essay in December:

“China is proactively writing a new set of rules as it replays the “Great Game,” creating a new type of globalization with new institutions like the Belt and Road Initiative, BRICS+, and the SCO  (Shanghai Cooperation Organization)

…the one thing that the BRICS are most aligned on is the de-dollarization of their fast-growing, bilateral trade flows…the drive to de-dollarize intra-BRICS trade and soon intra -BRICS+ trade will speed up.  Don’t tell me that doesn’t threaten the dollar’s supremacy, or that it won’t hurt the “exorbitant privilege”

…the U.S. dollar and Treasury securities will likely be dealing with issues they never had to deal with before: less demand, not more; more competition, not less.  

To be sure, the yuan’s market share in the global system remains minuscule. But the direction is clear. As Victor Xing at Kekselias Inc. put it: “The key characteristic of the present geopolitical development is ideological, rather than based on economic calculus. Therefore, it is harder to de-escalate, and it means the disruptions and decoupling has momentum to go on for a longer period of time.”