Economist Discusses Viability of BRICS Currency — Says Pegging to Chinese Yuan Would Be ‘First Major Step’

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An economist, who previously worked at the Bank for International Settlements (BIS), has provided insights on the possibility of a BRICS currency coexisting with the U.S. dollar. Noting that China is a major trading partner of all BRICS nations, he suggested: “Pegging to the renminbi and aligning their bilateral exchange rates would be the first major step.”

BRICS Currency vs U.S. Dollar

Herbert Poenisch, a senior fellow at Zhejiang University and former senior economist at the Bank for International Settlements (BIS), discussed the viability of a BRICS currency in an opinion piece published on Tuesday by the Official Monetary and Financial Institutions Forum (OMFIF).

The economist highlighted that during a meeting last week, foreign ministers from the BRICS countries (Brazil, Russia, India, China, and South Africa) convened alongside ministers from various nations, including Iran, Egypt, the United Arab Emirates, and Saudi Arabia. “The main topic of discussion was the creation of a common BRICS currency,” he noted, adding that the officials also discussed BRICS membership expansions. More than 19 countries have reportedly applied to join the economic bloc or have expressed interest in joining.

Poenisch explained that Russia, Brazil, and China currently utilize their respective currencies for settling bilateral trade payments, but this payment system encounters challenges when imbalances occur. Noting that creating a common BRICS currency “is not a new idea,” he opined:

But if such a currency is ever achieved, it is unlikely to replace the dollar — it would exist in addition to the established dollar-based global monetary system.

“It will be a regional initiative rather like the euro,” he continued, emphasizing: “In the case of Europe, the process from bilateral settlements to a common currency took close to 50 years.”

Pegging to the Renminbi

Poenisch further detailed that China is the main trading partner of all BRICS member nations, but trade between the member countries themselves is relatively limited.

“Pegging to the renminbi and aligning their bilateral exchange rates would be the first major step,” he suggested. “At the same time, a mechanism would have to be set up to provide credit in renminbi to countries that run trade deficits, such as India and South Africa.” He believes that an organization similar to the European Payments Union (EPU) and a management agent like the Bank for International Settlements (BIS) would need to be established.

“China would have to shoulder the burden to keep such a clearing system afloat,” he stressed. “This means setting up the mechanism and institutions, providing sufficient funds to support a liquidity shortfall and providing a reserve facility to deposit surplus funds. In addition, it would need to remove obstacles to the fungibility of the renminbi as surplus supply of other currencies should be freely converted into renminbi and used by other countries.” The economist described:

All this would boost the internationalization of the renminbi and increase the pressure on China to liberalize its financial account. Both have major ramifications for the country’s domestic monetary policy.

Do you agree with the economist about the BRICS currency and the U.S. dollar? Let us know in the comments section below.