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Ex-Goldman chief economist calls on BRICS to challenge USD's dominance as China leads de-dollarization trend

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(Kitco News) Former Goldman Sachs chief economist Jim O'Neill is calling on the BRICS bloc to expand and challenge the dominance of the U.S. dollar. China's recent actions with the yuan are already doing just that.

O'Neill said that the dollar's dominance destabilizes other nations' monetary policies, which is why the bloc — made up of Brazil, Russia, India, China, and South Africa — should counter it.

"The U.S. dollar plays a far too dominant role in global finance," he wrote in a paper published in the Global Policy journal. "Whenever the Federal Reserve Board has embarked on periods of monetary tightening, or the opposite, loosening, the consequences on the value of the dollar and the knock-on effects have been dramatic."

This was demonstrated over the past year as the Fed pursued its fastest tightening pace in decades to tame inflation, bringing its key policy rate from around zero to a range of 4.75%-5%.

O'Neill sees the dollar's dominance as a burden to nations with dollar-denominated debt since their monetary policies are destabilized when exchange rate fluctuations.

The ex-Goldman chief economist, who coined the group's name, is now calling on BRICS to expand to create a fairer, multi-currency global system by including emerging nations such as Mexico, Turkey, Egypt, Indonesia, Bangladesh, Vietnam, Pakistan and the Philippines.

At the same time, O'Neill urged the group to apply strict criteria when accepting new members, focusing on climate finance, healthcare, and trade.

Over a dozen countries have expressed interest in becoming members of the group. This year, the bloc plans to determine whether to admit new members and what entry criteria to establish. Saudi Arabia and Iran are among those who formally asked to join, according to media reports.

O'Neill added that new members should be more than just countries with large populations and sizable economies.

BRICS needs to work on expanding its influence with the World Bank and International Monetary Fund. According to the Institute for Security Studies in Pretoria, BRICS represents 42% of the global population, but its members hold less than 15% of the voting power at both institutions.

The de-dollarization trend by countries like China and Russia has dominated headlines this past year. Central banks bought a record amount of gold in 2022, led by emerging nations like Turkey and China. And that interest is carrying over into 2023.

Recently, China has stepped up using the yuan as a trade settling mechanism. The yuan-denominated trade flows between Russia and China surged last year. And last week, Russian President Vladimir Putin said he supports using the Chinese yuan for trade settlements between Russia, Asia, Africa, and Latin America. That statement came after the Chinese leader visited Moscow.

Another historic move by China was the completion of the first yuan-settled LNG trade, which was done between the Chinese national oil company and France's TotalEnergies through the Shanghai Petroleum and Natural Gas Exchange.

China also struck a deal with Brazil to trade in their own country's currencies, AFP reported this week, citing the Brazilian government. China has been Brazil's largest trading partner since 2009.

In other areas of cooperation, Saudi Arabia approved the decision to join a China-led Shanghai Cooperation Organization (SCO) as a dialogue partner. The SCO is a political, security and trade alliance created in 2001 to counter western influence. Its members include China, Russia, India, Pakistan and four central Asian countries.

Earlier this week, China and Saudi Arabia signed major oil deals. One will see state-owned oil giant Saudi Aramco take a $3.6 billion stake in Rongsheng Petrochemical Co. Ltd. to increase its presence in China. Also, the two countries agreed to construct an integrated refinery and petrochemical complex in northeast China.

"Saudi Arabia appears to be turning towards Beijing and away from the West," said Capital Economics deputy chief emerging markets economist Jason Tuvey. "That has fuelled talk of Saudi accepting renminbi for its sales of oil to China; the so-called 'petroyuan'."

Beijing is also becoming a major lender to debt-heavy nations, such as Turkey, Argentina, and Sri Lanka. In 2021, China shelled out $40.5 billion in loans to distressed countries, The New York Times reported, citing data provided by AidData. In comparison, the IMF lent $68.6 billion to countries in financial distress in 2021.

The U.S. dollar's loss of its reserve currency status is catching the attention of many public figures. In a tweet response to Grit Capital CEO Genevieve Roch-Decter on the topic, Elon Musk replied that it is a "serious issue" and that the U.S. policy has been "too heavy-handed, making countries want to ditch the dollar."

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