China and Russia ditch dollar in move towards ‘financial alliance’

Greenback’s share of neighbours’ trade falls below 50% for first time

Dimitri Simes, contributing writer

China and Russia have roughly halved their use of the dollar in trade settlements over the past five years © Dreamstime/FT Montage

Russia and China are partnering to reduce their dependence on the dollar — a development some experts say could lead to a “financial alliance” between them.

In the first quarter of 2020, the dollar’s share of trade between Russia and China fell below 50 per cent for the first time on record, according to recent data from Russia’s Central Bank and Federal Customs Service.

The greenback was used for only 46 per cent of settlements between the two countries. At the same time, the euro made up an all-time high of 30 per cent, while their national currencies accounted for 24 per cent, also a new high.

Russia and China have drastically cut their use of the dollar in bilateral trade over the past several years. As recently as 2015, approximately 90 per cent of bilateral transactions were conducted in dollars. Following the outbreak of the US-China trade war and a concerted push by both Moscow and Beijing to move away from the dollar, however, the figure had dropped to 51 per cent by 2019.

Alexey Maslov, director of the Institute of Far Eastern Studies at the Russian Academy of Sciences, told the Nikkei Asian Review that the Russia-China “de-dollarisation” was approaching a “breakthrough moment” that could elevate their relationship to a de facto Alliance.

“The collaboration between Russia and China in the financial sphere tells us that they are finally finding the parameters for a new alliance with each other,” he said. “Many expected that this would be a military alliance or a trading alliance, but now the alliance is moving more in the banking and financial direction, and that is what can guarantee independence for both countries.”

De-dollarisation has been a priority for Russia and China since 2014, when they began expanding economic co-operation following Moscow’s estrangement from the west over its annexation of Crimea. Replacing the dollar in trade settlements became a necessity to sidestep US sanctions against Russia.

“Any wire transaction that takes place in the world involving US dollars is at some point cleared through a US bank,” said Dmitry Dolgin, ING Bank’s chief economist for Russia. “That means that the US government can tell that bank to freeze certain transactions.”

The process gained further momentum after the Trump administration imposed tariffs on hundreds of billions of dollars worth of Chinese goods. Whereas previously Moscow had taken the initiative on de-dollarisation, Beijing came to view it as critical, too.

“Only very recently did the Chinese state and major economic entities begin to feel that they might end up in a similar situation as our Russian counterparts: being the target of the sanctions and potentially even getting shut out of the Swift system,” said Zhang Xin, a research fellow at the Center for Russian Studies at Shanghai’s East China Normal University.

In 2014, Russia and China signed a three-year currency swap deal worth Rmb150bn ($24.5bn). The agreement enabled each country to gain access to the other’s currency without having to purchase it on the foreign exchange market. The deal was extended for three years in 2017.

Another milestone came during Chinese president Xi Jinping’s visit to Russia in June 2019. Moscow and Beijing struck a deal to replace the dollar with national currencies for international settlements between them. The arrangement also called for the two sides to develop alternative payment mechanisms to the US-dominated Swift network for conducting trade in roubles and renminbi.

Russian President Vladimir Putin hosts his Chinese counterpart, Xi Jinping, in June 2019
Russian President Vladimir Putin hosts his Chinese counterpart, Xi Jinping, in June 2019 © AFP

Beyond trading in national currencies, Russia has been rapidly accumulating renminbi reserves at the expense of the dollar. In early 2019, Russia’s central bank revealed that it had slashed its dollar holdings by $101bn — over half of its existing dollar assets. One of the biggest beneficiaries of this move was the renminbi, which saw its share of Russia’s foreign exchange reserves jump from 5 per cent to 15 per cent after the central bank invested $44bn into the Chinese currency.

As a result of the shift, Russia acquired a quarter of the world’s renminbi reserves.

Earlier this year, the Kremlin granted permission to Russia’s sovereign wealth fund to begin investing in renminbi and Chinese state bonds.

Russia’s push to accumulate renminbi is not just about diversifying its foreign exchange reserves, Mr Maslov explained. Moscow also wants to encourage Beijing to become more assertive in challenging Washington’s global economic leadership.

“Russia has a considerably more decisive position toward the United States [than China does],” Mr Maslov said. “Russia is used to fighting, it does not hold negotiations. One way for Russia to make China’s position more decisive, more willing to fight is to show that it supports Beijing in the financial sphere.”

Dethroning the dollar, however, will not be easy.

Jeffery Frankel, an economist at Harvard University, told Nikkei that the dollar enjoyed three major advantages: the ability to maintain its value in the form of limited inflation and depreciation, the sheer size of the American domestic economy, and the United States having financial markets that are deep, liquid and open. So far, he argued, no rival currency has shown itself capable of outperforming the dollar on all three counts.

Yet Mr Frankel also warned that while the dollar’s position is secure for now, spiralling debts and an overly aggressive sanctions policy could erode its supremacy in the long run.

“Sanctions are a very powerful instrument for the United States, but like any tool, you run the risk that others will start looking for alternatives if you overdo them,” he said. “I think it would be foolish to assume that it’s written in stone that the dollar will forever be unchallenged as the number one international currency.”


by Egon von Greyerz

Is Covid the most perfect distraction that could have hit the world? The timing couldn’t have been more perfect for the European and American economies. We know that there were major problems in the financial system back in August-September 2019 when both the ECB and the Fed declared that they would do what it takes. And since then we have seen massive injections of liquidity in the form of QE and Repos.

The world was never informed what the financial problems were but it is obvious that this was the hangover from the 2006-9 financial crisis which was never solved but just deferred with the help of unlimited money printing and credit expansion. There was clearly something rotten in the kingdom of the financial world.


So was it just coincidence that Coronavirus started spreading around the world in January-February this year in the middle of a serious crisis in the financial system?

Throughout history, initiating a crisis has always been a popular remedy that leaders have applied to divert attention from the real problem whether it be political or financial.

The normal course of action would be a military conflict. This would both enable massive money printing and also alarming the people which would result in more votes for the ruling government.

The American writer Henry Louis Mencken understood the purpose of these actions:

I am not someone who subscribes to conspiracy theories. But however the Coronavirus started, the timing seems more than coincidental.

CV has certainly diverted the attention away from the underlying problems in the financial system and undeniably seems like a hobgoblin. But whether it is a hobgoblin or not, it has allowed some governments around the world to blame it all on CV and run huge deficits combined with massive liquidity injections.

The coming likely implosion of the financial system and depression will for decades be blamed on a pandemic which was only a catalyst and never the cause of the fall of the global economy. The real cause is a rotten financial system and an unmanageable debt burden which I have discussed in many articles.


If we look at the effects of CV on various countries the differences are astounding. Sweden which has had virtually no lockdown saw an 8.6% fall in GDP in Q2. Much of the fall was due to lower exports as other countries bought less Swedish products. Switzerland which only has had a very limited lockdown had a 6.4% GDP fall in Q2.

If we then look at the two countries which have totally mismanaged the situation – USA and UK, the outcome is disastrous. US GDP fell 32.9% in Q2 and the UK GDP was down 20.4%.


It is clear that the countries that have big ego autocratic leaders have fared the worst.

Sweden and Switzerland have delegated the CV policy to health officials whilst in the US and UK much of the policy, or lack of, has come from the top.

Sadly the US and the UK have both had high numbers of CV cases and deaths. And in spite of major lockdowns, these two countries have seen a catastrophic decline in their economies, a fall which will take many years to recover from.


It is clearly no coincidence that Sweden and Switzerland have strong and well managed economies also whilst the US and the UK are running big deficits and debts. And with the poor economic state of the two latter countries, their economies will continue to suffer badly.

Personally I don’t believe that there will be an effective vaccine for years or ever. Historically, any flu vaccine takes years to develop and is only effective in less than 30% of vaccinated people.

We are also seeing CV coming back in many countries that have lifted the lockdowns like for example Germany, Spain and France. Therefore it seems very likely that there will not be any major global recovery in 2021 either.

The biggest dilemma is that CV is not the real cause of the economic downturn but only the catalyst. As I explained above, the virus has allowed weak countries to print huge amounts of worthless money to prop up a financial system in an economy which was already on the verge of imploding before CV started.

But fortunately for leaders such as Trump and Johnson they have been lucky to hide their ailing economies behind the CV curtain. So for them CV has been a very lucky excuse.

As the US, UK and many economies will be forced to continue or increase government handouts to suffering people and companies, all these countries’ will fall further into the quagmire of debt, deficits and economic decline.


The biggest miracle currently is the stock market. After the February-March collapse, we have seen a rally that defies reality. This rally is a total disconnect with economic facts and only based on a combination of hope and printed money which is worthless.

On January 30th this year I published an article called “INFLATE AND DIE – STOCK COLLAPSE AND GOLD SURGE IMMINENT”

The forecast which was based on our cycle system, was quite timely. The Dow crashed and gold went up just a few weeks later. The rallies we have seen since are not confirmed by any technical indicators and are likely to run out of steam very soon.

I forecasted that the Dow monthly top would be in January and that is still the case. We have some indications that we could see big moves (down) in stocks in August and September.

But whether stocks soon start to reflect reality or it takes a bit longer is irrelevant. Stocks are overvalued on any criteria and anyone who stays invested will have his greed severely punished.

Much has been made of Buffett’s entry into gold by buying Barrick stocks for $1/2 billion. Has also sold shares for $13 billion including many bank stocks.

Relatively this $0.5b into gold stocks is very small. This was at the end of Q2 so it might have increased since.

Nevertheless, the $0.5b is 0.07% of this total portfolio so hardly significant. More importantly, it is a major mental change since Buffett has always talked down gold. Buffet had an important position in silver in 1996 but managed to lose money on it even though silver went up at the time. His people managed to mess up a derivative hedge position against silver.

Buffett has been a master investor and ridden a wave for decades. It has confirmed what I wrote about a typical buy and hold investor like Alfred who successfully has only bought and never sold since 1945. Sadly, I believe that both Warren and Alfred are going to lose most of their stock market money, in real terms (gold), in the next few years.

Buffett has $150b in cash which is 20% of total asset. If he spent that on physical gold and gold stocks he would crash protect his portfolio. Just in gold it would mean 2,400t which is 80% of annual mine production so it would clearly take time to accumulate and move the price.


Gold moved from a price of $1,450 in March to a high of $2075 on the Aug 6, a 43% move.

For the first time in a long time the media started to talk about gold and also many people who normally never look at the gold price.

This is often a sign of a short term top and that was clearly the case. From the high on Friday the 7th of Aug, gold lost $200 in three days.

It has since recovered and is at $1,985, well above the 2011 top.

This kind of fall is exactly what a short term overbought market needs. It gets rid of the weak hands and speculators. It is possible that the correction will be a bit deeper and last a bit longer, especially if stocks fall.


Absolutely nothing has changed in the long term bull market of gold that in this phase started in 1999. What guarantees this secular bull market in gold is central banks’ continued and accelerated destruction of paper money. Nothing can be more certain than that. So gold between $1,900 and $2,000 is still an absolute bargain.


The chart below comparing gold to US money supply tells us that gold is as cheap today at $1,945 as it was in 1970 at $35 and as cheap as in 2000 at $290.

So measured in fiat money, gold is likely to move up by multiples from here. But it is obviously meaningless to measure gold in a unit like dollars which will become worthless. So if the dollar becomes worthless gold, will go to infinity which is immeasurable too.

Just think about gold in grammes or ounces as the best insurance and wealth preservation asset that you can acquire today. It is a bargain at current levels and will protect investors from the destruction of currencies and the financial system.

South Korea on Top Again

The latest economic and public-health indicators show that South Korea is far ahead of most others in managing the COVID-19 pandemic and staging a robust economic recovery. The country's success is no accident, and it is time for others to start following its example.

Jim O'Neill

oneill84_Chung Sung-JunGetty Images_southkoreacoronavirusdigitalapp

LONDON – On August 11, the OECD signaled that it would be revising its 2020 real (inflation-adjusted) GDP forecast for South Korea from -1.2% to -0.8%, adding to the confidence that the country is faring better economically than any other OECD member.

On average, the group’s 37 member states are projected to experience a real GDP contraction of 7.6%.

Worse, this news came just a day before the United Kingdom’s government reported a record-breaking second-quarter contraction of 20.4%, following previous forecasts that the UK economy was on track to shrink by 11.5% overall this year.

Forecasts are only forecasts, and the OECD’s track record is no better (or worse) than other official sources of such data. Based on my own reading of recent high-frequency indicators, I suspect that global output figures in 2020 will turn out to be less grim than many expect.

Still, for the purposes of making cross-country comparisons, the OECD’s outlook is reliable. For example, the data clearly show that South Korea stands out from the crowd. The country has long been a role model for other developing economies, and it is now increasingly becoming one for more “advanced” economies like the United States and the UK.

In retrospect, it would not have been unreasonable to assume that South Korea would suffer more than other OECD countries from the pandemic. In late January, it became one of the first countries to report COVID-19 infections outside China, and the risk of a major outbreak was no lower than anywhere else.

But unlike Italy – another early victim – South Korea has prevented a disruptive nationwide epidemic, containing occasional flare-ups as they have arisen. Moreover, insofar as the OECD forecast is correct, South Korea’s 2020 contraction is nothing compared to what the country experienced following the 1997-98 Asian financial crisis.

Back in mid-March, many respected commentators focused on the fact that the UK was just two weeks behind Italy, making almost no mention of South Korea. In the event, both Italy and the UK went on to suffer especially deep crises, relative to other countries. Why did South Korea – a major trading country – manage the novel coronavirus so much better, and what early lessons might have been taken from its experience?

At this point, no one can say with certainty what factors have made the biggest difference. But if I were to speculate, I would point to those features of South Korea’s economy that have been serving it especially well for the past few decades.

On February 20, I published a commentary entitled “All Eyes on South Korea” in response to this year’s Academy Awards, where South Korean director Bong Joon-ho’s film Parasite won Best Picture. South Korea is often stereotyped as being too wooden and obsessed with education, but here was a South Korean film receiving one of the world’s top artistic honors.

To my horror, between the writing and the publication of that commentary, South Korea had begun to experience its first COVID-19 outbreak. I feared that events on the ground would soon refute all my praise for the country. But I shouldn’t have worried. Almost six months later, it is clear that South Korea has once again acquitted itself well.

More broadly, South Korea has become a model for other countries for two simple reasons.

First, over the past 40 years, it has been the only medium- to large-size (by population) “developing” or “emerging” economy to have increased its per capita income to the level of the advanced economies. When I was entering the workforce in the early 1980s, South Korea was about as wealthy as most African countries, on average. Today, it is as wealthy as Spain.

Second, South Korea has not only grown; it has also climbed the economic ladder by embracing technology. When I was Chief Economist at Goldman Sachs, I presided over the creation of a sustainable development index for more than 180 countries. We found that, in addition to ranking among the top ten on most indicators, South Korea scored especially high on measures of technological adoption and diffusion – higher even than the US.

Crucially, the subcomponents in our index captured not just who was inventing or manufacturing certain technologies – from mainframe computers to mobile telephones – but also who was using them.

South Korea today is a technologically intensive society, and that has almost certainly made a difference in the context of the pandemic, particularly when it has come to monitoring localized risks and containing the spread of the virus.

By contrast, in the UK, we are still a long way from having a “world-class” testing and tracing system, because the necessary technologies simply are not available to enough of the population.

South Korea is highly open to world trade, and it reports its trade data on the first of each month. The data for July show that its export performance has improved notably (which is to say that it is not declining as sharply as in the preceding months).

This improvement may or may not be a harbinger of what awaits the global economy as it recovers from a historic collapse. But it is clearly another sign that South Korea has managed the crisis well, particularly compared to the ridiculous displays of bravado, denial, and incompetence in some of the world’s advanced economies. It is time for everyone to start learning from South Korea.

Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK Treasury Minister, is Chair of Chatham House.

Apple at $2 Trillion Leaves No Room for Error

Milestone would bring record valuation just as key App Store business model comes under attack

By Dan Gallagher

Apple’s market value first crossed the $1 trillion mark in August 2018. One of the company’s stores in Beijing in July. / PHOTO: WU HONG/SHUTTERSTOCK

Apple Inc. AAPL 0.83% will be a $2 trillion company very soon. The irony is this shows just how little it can afford to lose.

As of Tuesday’s close, Apple’s share price was about 1% below the level needed to exceed a $2 trillion market capitalization. Apple has enjoyed a strong run: The stock has averaged a weekly gain of 3.5% since the beginning of June, according to FactSet.

Its business has proven surprisingly resilient to the pandemic. The company still generates more than 80% of its revenue by selling high-price devices made almost entirely in China, where the outbreak first occurred.

Combined revenue from all those devices grew 10% year over year in Apple’s most recent fiscal quarter ended June 27. The stock has jumped 20% since those results were reported on July 30. 

But Apple is also now facing an unprecedented challenge to its App Store business, putting it in the crosshairs of lawmakers and regulators on both sides of the Atlantic.

The matter has escalated significantly over the past few days, as Epic Games sued both Apple and Google in federal court after the two companies removed its popular “Fortnite” videogame from their app marketplaces as Epic tried an end run around their respective payment systems.

In a new twist Monday, Epic sought a restraining order against Apple to prevent the game’s removal and to keep Apple from ejecting Epic from its developer program.

Since its launch in 2008, the App Store has grown into a crucial business for Apple. Based on regulatory filings, the App Store has been the largest contributor to the growth of Apple’s services segment in three of the past four fiscal years.

The services segment is now Apple’s second-largest segment after the iPhone—and the one that has delivered the most steady growth over the past four years as the smartphone business has matured.

Service gross margins are also key to Apple’s overall business model, coming in 34 percentage points higher than the company’s product gross margins for the nine-month period ended June 27.

The ultimate outcome of the Epic lawsuit and regulatory probes is impossible to predict. But at $2 trillion, the market is valuing Apple as if nothing could go wrong. At that level, the stock trades at more than 32 times forward earnings—or 31 times excluding $81 billion in net cash on the company’s balance sheet.

That is its highest multiple in more than a decade. It is also about double the multiple the shares fetched when Apple’s market value first crossed the $1 trillion mark in August 2018.

In other words, all a $2 trillion valuation really means is that Apple investors are now willing to pay twice as much for the same earnings outlook.

With a key business under attack—and a lot of hype about a 5G iPhone being launched this fall into a weakened global economy—that’s a big bet indeed.