This short note aims to decipher a striking chart related to current economic events. This Killer Chart highlights the continuing significant weight of US sovereign bonds in the foreign exchange reserves of the BRICS countries. It revisits the misinterpretations regarding the impact ofthe expansion of the BRICS countries, discussed at the Kazan Summit, on the predicted decline of the dollar.
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Why is this interesting?
The predicted decline of the US dollar (USD) has become an increasingly recurring topic in recent years. The predicted end of the USD’s dominance is expected to reshuffle the global deck by redrawing international relations around China rather than the United States.
This topic resurfaced at the last BRICS summit in Kazan in October 2024. Given the announcements of expansion to other countries, some believe that the process of de-dollarization will accelerate and that the yuan could well replace the greenback, benefiting from China’s influence within an expanded BRICS community.
Indeed, following its accession to the World Trade Organization (WTO) in 2022, China has established itself as a leading player in trade, with increasing use of the yuan to conduct its transactions (nearly 25% of its total trade compared to an average of 15% in the early 2010s, according to the Fed). Furthermore, the recent internationalization of the yuan and progress toward a digital yuan areseen as decisive factors in the strong expansion of the Chinese currency.
However, to conclude that the expansion of the BRICS will inevitably lead to the yuan establishing itself as an alternative to the USD in the medium to long term seems, at best, premature and, more likely, erroneous. Such conclusions most likely reflect a lack of understanding of international financial mechanisms and data.
What should we make of this?
Beyond the growing use of the yuan in international trade, several indicators suggest that its role and potential impact should be viewed with caution.
The share of the USD in global foreign exchange reserves has indeed tended to decline in recent years. This is undeniable, but it reflects the historical dominance of the USD. This share fell from an average of nearly 72% of foreign exchange reserves at the end of the 1990s to 58% in H1 2024[4] (COFER). Although the yuan has seen its share increase rapidly since 2016, it remains very low (2.1% of global foreign exchange reserves) and has even declined since 2022 (-0.7 ppt). Furthermore, according to International Monetary Fund estimates, Russia held one-third of global foreign exchange reserves in yuan in 2022, a concentration effect that puts the yuan’s real international weight into perspective. According to COFER data, the diversification of global foreign exchange reserves has been driven mainly by other currencies (e.g., the Canadian and Australian dollars and the Korean won).
The decline in the share of US bonds held by non-residents, and more specifically by certain BRICS countries, also seems to be worrying some analysts (see this other Killer Chart published on BSI Economics). In reality, this is less a sign of mistrust in the USD than i) lower amounts of refinancing of maturing US bonds by certain countries, and ii) economic events leading central banks to sell their USD foreign exchange reserves to support their currencies, with the result that net purchases of US bonds sometimes become negative.
Furthermore, the BRICS countries actually have little interest in selling their USD foreign exchange reserves to accelerate diversification, as these reserves still make up a very significant portion of their foreign exchange reserves: 43% on average (excluding Russia) when only US sovereign bonds are counted (see chart) and nearly 60% on average when all US bonds are counted. These figures are slightly lower for countries that could potentially join the BRICS, but remain significant nonetheless. Without a credible alternative to the dollar, selling off large amounts[6] of foreign exchange reserves would reduce their monetary margins significantly and inevitably lead to financial instability.
At this stage, within the globalized international monetary system, no current or future BRICS member is in a position to offer a credible alternative to the USD. While the yuan is set to play a more important role in the coming decades, it does not represent a reliable alternative, either in the short or long term, to the point of dethroning the USD.
A chapter in the latest book by BSI Economics outlines the main reasons for this: i) capital controls in China mean that the country’s financial account is only opening up very gradually, which does not favor a large-scale international expansion of the yuan; (ii) Chinese securities are available in limited quantities, due to a local financial market that is relatively small compared to that of the United States; (iii) financial stability is undermined by the prolonged real estate crisis (high household, corporate, and local government debt); and (iv) some foreign investors are becoming increasingly averse to China.
While the international weight of the US dollar is likely to decline in the medium to long term in favor of other currencies, including the yuan, the dollar’s dominance is unlikely to be challenged. There are still many questions about the yuan’s ability and speed to establish itself as a real alternative to the USD, and the expansion of the BRICS would not be an event to be taken lightly.
[1] United Arab Emirates, Ethiopia, Iran, Egypt, Turkey, Malaysia, Indonesia, Saudi Arabia.
[2] Chinese exports accounted for nearly 6% of total exports in 2002, compared with nearly 15% today.
[3]See chapter 6 of the book by BSI Economics published by Dunod in 2024, « 12 clés économiques pour aborder 2030 » (12 economic keys to approaching 2030), with a chapter dedicated to China in which economists V. Lequillerier and E. Banh address the specific issue of the challenges of the internationalization of the yuan.
[4] The recent scale of the decline would be even greater once the exchange rate effect linked to the appreciation of the USD in recent quarters is deducted.
[5] Several factors explain this trend: diversification of reserves to smooth the impact of USD fluctuations, the search for higher yields, greater accessibility of other currencies and currency risk hedging tools compared to the past, etc. Furthermore, as emerging countries see their share of trade with each other increase, with the proliferation of currency swap agreements between central banks, settlements of transactions in currencies other than the USD are facilitated. This diversification process is part of a natural cycle of trade evolution and leads de facto to a decline in the weight of the USD relative to other currencies. In addition, the diversification of foreign exchange reserves has also led to increased purchases of gold, driving prices to record highs.
[6] The range of reserves denominated in other currencies, which offer similar advantages to those in USD, remains limited. Reserves denominated in euros, pounds sterling, and yen offer similar characteristics and already serve as international benchmarks. Despite this, they have not been able to challenge the dominance of the USD (even in the case of the euro). More « exotic » currencies, such as those of emerging economies, do not necessarily offer the same advantages. Holding them exposes investors to additional costs, linked to higher risk premiums due to often less robust macroeconomic fundamentals (currency risk, inflation premium, sovereign risk, etc.). Ultimately, gradually selling off USD foreign exchange reserves and replacing them with reserves offering similar levels of liquidity appears viable if i) holding them does not expose the country to various additional costs and if ii) these assets are available in volumes similar to those in USD.
