De-Dollarization: Major International Bank Joins Chinese Payment Global System

By Mike Maharrey

HSBC Hong Kong announced it will formally join China’s Cross-Border Interbank Payment System (Cips).

The move is yet another body blow to dollar dominance. According to the Financial Times, it will give “the world’s biggest player in trade finance a key role in Beijing’s push to expand use of the renminbi.”

London-based HSBC is one of the world’s largest banking and financial institutions. It was founded in 1865 to facilitate trade between Europe and Asia. HSBC operates in over 60 countries across Asia, Europe, North America, and the Middle East.

HSBC already indirectly participates in Cips. By becoming a direct participant in the payment system, the bank’s Hong Kong unit will be able to directly settle payments in renminbi for the first time.

According to the Financial Times, HSBC is in the midst of a “sweeping overhaul” that will set up its UK and Hong Kong units as separate divisions.

A bank executive said the move to join Cips is “in response to the needs of our customers.”

Another Step Toward De-Dollarization 

China touts Cips as an alternative to the SWIFT payment system.

China established Cips in 2015, but the system has gained more attention since the U.S. and its allies locked Russia out of SWIFT in response to its invasion of Ukraine.

SWIFT serves as the global economy’s superhighway. In effect, it operates as a global financial messaging service, facilitating cross-border payments. As the SWIFT website puts it, “SWIFT is the way the world moves value.” 

Since the dollar serves as the world reserve currency, SWIFT effectively facilitates an international dollar system. 

Cips partners with SWIFT, but it also has a standalone messaging system. It is currently used by 135 countries that are part of China’s “Belt and Road” infrastructure program. 

Leaders in some countries have become wary since the U.S. has weaponized the dollar for foreign policy purposes.

While aggressive sanctions may make sense from a Western foreign policy perspective, it has made a lot of countries wary and sped up the movement to minimize dependence on the greenback. After all, if you have something that can be used as leverage against you, it’s only natural to try to minimize your exposure to that thing. If the U.S. can pull the dollar rug out from under you, why not try to get that rug out of the room?

When announcing HSBC Hong Kong’s plan to join Cips at a conference in Beijing, David Liao, HCBC co-chief executive of the bank’s business in Chinese territory, said the dominant role of the U.S. dollar was being “diluted.”

Executive dean of the Chongyang Institute for Financial Studies at Renmin University of China Wang Wen noted that “in the past two years, the US has promoted the weaponization of finance and abused the U.S. dollar payment system to strike, retaliate against and sanction other countries,” and this has “forced countries to be willing to accept new cross-border payment systems.”

While the dollar isn’t in any danger of losing its status as the world’s reserve currency (yet), we are seeing a global move toward a “multipolar” financial system that doesn’t rely solely on the dollar.

Wang told the Financial Times that many large international banks are making “two-way bets” on competing international payments systems, and he said Cips could boost the role of the Chinese yuan in international finance. He said Cips provides “diversified arrangements for a better cross-border system, making the internationalization of the renminbi more rapid in the future.”

Even a modest erosion of dollar dominance could have significant ramifications for the U.S. economy. And we’re already seeing it happen. Dollar reserves globally have dropped by 14 percent since 2002, and de-dollarization accelerated after the U.S. and her Western allies aggressively sanctioned Russia. 

Because the global financial system runs on dollars, the world needs a lot of them, and the United States depends on this global demand to underpin its bloated government. The only reason the U.S. can borrow, spend, and run massive budget deficits to the extent that it does is the dollar’s role as the world reserve currency. It creates a built-in global demand for dollars and dollar-denominated assets. This absorbs the Federal Reserve’s money creation and helps maintain dollar strength despite the Federal Reserve’s inflationary policies.

But what happens if that demand drops?

A de-dollarization of the world economy would cause a dollar glut. The value of the U.S. currency would further depreciate. At the extreme, global de-dollarization could spark a currency crisis. You and I would feel the impact through more price inflation eating away at the purchasing power of the dollar. In the worst-case scenario, it could lead to hyperinflation.

Originally Published on Money Metals Exchange.