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The decline of dollar hegemony

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Photo: Shutterstock

21-May-2021


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By Wang Dan

Editor’s note: Wang Dan is the chief economist at Hang Seng Bank China. The article reflects the author’s opinions and not necessarily the views of CGTN.


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The U.S. ultra-loose monetary policy has hurt its currency credit. At the beginning of the pandemic, such a policy response was justified. After COVID-19 went global in early 2020, there was a scramble for the dollar, causing a surge in its valuation. In response, the Federal Reserve promised an infinite supply of the dollar, mostly through quantitative easing, to stabilize its value. 

As time went by, the ultra-easy monetary policy started to seem problematic because the market expected that in the mid-to-long term, the dollar would stay weak. The Fed also seems not in a hurry to raise interest rates any time soon even if the inflation is rising. As a result, the dollar has been losing value to all prominent currencies since the pandemic, including the euro, yen, pound and yuan, while capital rushed into the U.S. stock market, pushing its valuation to an all-time high. Risks are accumulating within the financial system.


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The key to being a global currency is the ability to maintain a stable value, particularly during an economic crisis. Yet the present market expectation is a weak dollar in the mid-to-long term. This is partly due to the ultra-loose monetary policy in the U.S., and partly because of the global economic recovery. When the world is in a crisis mode, people tend to hold dollars as they are considered safe assets. When the recovery begins, however, the return from holding extra dollar-denominated assets diminishes as the expected return diminishes. Global investors will thus start to look for better deals elsewhere, including emerging markets.

The dollar’s decline started even before the pandemic. Market confidence in the dollar was shaken significantly by the 2008 financial crisis. Afterward, the Fed had kept the interest rate artificially low for an extended period to pump up the economy, which has eroded the appeal of dollars. Another reason for the dollar’s fall is the U.S.’s increasingly aggressive use of financial sanctions. These sanctions not only affect countries of the target, like Russia and China, but also other parts of the world where people wish to do business as usual. In this dollar-central financial system, all countries are vulnerable. Every country may get into a dispute with the U.S. at some point. The Biden administration is more predictable than the Trump administration, but there is no guarantee that the U.S. won’t have a Trump-like figure again in the future. Given how frequent the U.S. is relying on financial sanctions as a weapon, it is no surprise that countries wish to diversify away from dollar reserves.


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Alipay and WeChat Pay logos appear at the checkout counter at Charles de Gaulle Airport Duty Free Shop in Paris, France, July 3, 2018. /CFP

In contrast, the Chinese yuan’s share in the global reserve has increased significantly since the pandemic. The momentum shows no signs of slowing down. One reason is the strong rise of China’s digital platforms, particularly Alipay and WeChat. They have globalized a lot faster than conventional banks and have become critical players in consumer finance around the world. To attract Chinese tourists, many more businesses in Asia, Europe and even in the U.S. are accepting online payment through Chinese apps. China’s central bank is another important driving force. The central bank digital currency is picking up pace in rollout within China. Though it’s still a long way away before becoming a means for international transactions, this will provide the necessary infrastructure for cross-border transactions in yuan in the future.

Despite rapid growth, the Chinese yuan’s global payments remain small, currently at around 2.5 percent, compared to 20 percent of the euro and 59 percent of the dollar. The Chinese government has proven its ability to restore growth and keep its currency stable after COVID-19. The next step would be to make the yuan more convertible by gradually opening the capital account. China has already launched Bond Connect to allow foreigners to invest in onshore bonds through Hong Kong and allowed international credit-rating agencies to operate in the Chinese mainland. 

In international financial contracts, Chinese companies have stepped up efforts to negotiate terms in yuan for more projects. Yet most Belt and Road projects are still financed by dollar loans. It has become a more urgent need to expand the usage of the yuan before the U.S. imposes more restrictions on China’s dollar financing.

Being a global currency incurs both costs and benefits. Higher demand for the yuan will inevitably drive up its value relative to others, which will hurt domestic exporters and motivate more companies to set up factories overseas. China’s productivity growth is already faster than that of the U.S., which exerts additional pressure for the yuan’s real appreciation. A silver lining is that a more flexible yuan will grant more room for monetary policy at home. 

Previously China’s central bank needed to be concerned about both the domestic economy and the stability of the exchange rate market, which has limited the scope of policy effect. In the end, currency supremacy is up to a country’s economic clout and financial innovation capacity. In those two regards, the tide is on China’s side.


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Africa Finance Corporation – Changing the Narrative on Africa

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Africa is on a major growth trajectory and the future belongs to Africa .


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New luxurious Vic Falls hotel close to opening

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from DANIEL JONES in Victoria Falls, Zimbabwe
VICTORIA FALLS, (CAJ News) – THE multimillion dollar hotel that is the latest such facility in the prime resort town is set to open its doors in the Victoria Falls in July.


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Spencers Creek is building the Palm River Hotel on the edge of the Zambezi River, at a cost of US$24,6 million.

The 71-room four-star hotel, built in partnership with Old Mutual Zimbabwe, targets high end travelers to Zimbabwe’s tourism capital.


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Spencers Creek already runs Ilala Lodge Hotel group, another luxurious facility, in the town.

Heather Kay, the Ilala Lodge general manager, said the new hotel would comprise 60 deluxe rooms, two deluxe suites, two honeymoon suites, two family suites, three executive suites, one presidential suite and one Palm River Villa inclusive of three bedrooms.


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It is also sensitive to disability as it includes two wheelchair accessible rooms.

“Construction of Block A (Acacia) and Block B (Baobab) made up of predominantly Deluxe rooms and a Presidential Suite, together with a refreshing 20-metre infinity pool are now complete and await the arrival of the first guests,” Kay said.


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She said Block C (Combretum) and the main area including the reception, dining hall, bar and fresco restaurant are currently receiving the last of their final touches in preparation for the opening.

Block D (Duiker-berry), Block E (Ebony) and Block F (Fig) are being constructed and expected to be finished this November.

Kay said the hotel is elegantly appointed with comfort and space in mind and the interior design of the rooms is focused on bringing the stylish use of natural tones, locally sourced materials and artwork reflective of the area together.

She said the tastefully modern style of the Queenslander is reflected in the inside as well as the outside, giving a new sense of luxury in the resort city providing guests with comfortable modern convenience.

A river deck on the edge of Zambezi and a large alfresco dining area under a canopy of trees offering an A’la carte service, an outdoor bar, conferencing and events facilities, a pool that transforms into a star wonder-lit completes the luxury.

Palm River has made plans for a shuttle to transport clients between town and the lodge via some areas of interest such as the rainforest, Big Tree, Victoria Falls Bridge and Zambezi National Park.

The Palm hotel is one of a number of tourism developments in Victoria Falls.

President Emmerson Mnangagwa toured the site before construction last year in August.

Construction was delayed by challenges posed by COVID-19.

Recently built lodges in the area include Shearwater Village Explorer, Wild Horizon’s Old Drift and Mbano Manor Hotel and Mpala Jena Camp.

– CAJ News


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De-risking the World’s Future Growth Engine:

African Trade Insurance (ATI) joins The Canada-Africa Chamber of Business

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n our 27-year history as a Chamber of Business (www.CanadaAfrica.ca), the latest range of risk insurance instruments from the African Trade Insurance (ATI) Agency is a major leap forward for Canadian institutional investors and African countries – standing to unlock billions in investment capital.


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ATI facilitates inward investment in Africa by providing insurance against trade and investment risks. This month the organization joined The Canada-Africa Chamber of Business.

‘ATI is a game-changer. From discussions with private equity and pension fund representatives, ATI has the potential to ensure both the perceived and real risks on the continent are well-managed; ensuring investment committees can proceed on deals that until recently may have been deemed too risky,’ says Sebastian Spio-Garbrah, Chair of the Board, Chair of the Board at The Canada-Africa Chamber of Business.


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The Canada-Africa Chamber of Business invites interested parties to learn more.

Join us on Thursday 20 May 2021 at 10:00 ET/ 16:00 CAT / 17:00 EAT


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View the Full Virtual Program (https://bit.ly/3ooyuNB)

RSVP (https://bit.ly/3eSzlmu)


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ATI has a good market position in Africa, based on the scale of its underwriting penetration and benefits from significant local expertise and understanding in a number of African countries. It currently insures trade and investments worth over USD6 billion or an average of 1-2% of GDP annually in its African member countries. ATI’s partners and clients include African Governments, lenders, traders (both domestic & international) and project developers.

‘It has become increasingly clear that to achieve “the Africa we want” the role of private sector must become central in mobilizing the needed resources. Alliances like this one present excellent opportunities to address the development challenges facing our region.’ – Manuel Moses, Chief Executive Officer, ATI

‘During my career on Bay Street, it was clear solutions were needed to unlock the billions of investable capital in Canada. ATI has since developed a suite of products that in my view has dramatically changed the landscape in recent years’  – Deepak Dave, Chief Risk Officer, ATI

ATI’s African Member states contribute, along with international governments, multilaterals and private sector to the pool of capital underwriting investments, without holding any influence over ATI operations. The Nairobi-based multilateral has maintained an ‘A/Stable’ rating for Financial Strength and Counterparty Credit by Standard & Poor’s, and in 2019, ATI obtained an A3/Stable rating from Moody’s.Distributed by APO Group on behalf of The Canada-Africa Chamber of Business.

For More Information:
Garreth Bloor
President
The Canada-Africa Chamber of Business
Tel: +1.647.667.1223
Email: garreth@canadaafrica.ca
Manulife Building RTO
55 Bloor Street West
PO Box 19553
Toronto
Ontario M4W 3T9

About The African Trade Insurance Agency:
ATI was founded in 2001 by African States to cover the trade and investment risks of companies doing business in Africa. ATI predominantly provides Political Risk, Credit Insurance and, Surety Insurance. In 2020, ATI closed the year with a gross exposure of US$6.3 billion and a net profit of US$39.4 million, owing to a strong demand for ATI’s insurance solutions from the international financial sector and from African governments. Since inception, ATI has supported US$66 billion worth of investments and trade into Africa. 
www.ATI-aca.org

About The Canada-Africa Chamber of Business:
The Chamber is committed to accelerating trade, business and investment between Canada and African markets, through world-class networking and information sharing opportunities.

Founded in 1994, the Chamber is based in Toronto and Ottawa, with members located throughout Canada and African markets.

The Chamber is an independent, not-for-profit organization with strong working links with both Canadian and African businesses and governments.
www.CanadaAfrica.ca


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