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Can a Russia-China economic axis takedown dollar hegemony?

Charles-Henry Monchau, CIO of Bank Syz.

By Charles-Henry Monchau, chief investment officer, Syz Bank

Almost exactly 50 years ago, US President Nixon returned from a week-long diplomatic visit to China. The success was unequivocal: he had convinced his Chinese counterpart to move away from the Soviet orbit and help America spy on the USSR. Nixon was then re-elected. The stage was set for China’s eventual integration into the world economy.

Today, the world has changed. China’s role in the international system has taken on far greater proportions than Nixon had imagined. On the Chinese side, President Xi Jinping makes no secret of his view that America is a declining superpower that will do anything to block China’s inexorable rise to global supremacy. Donald Trump had begun a decisive turnaround by imposing tariffs on Chinese products. Now President Biden, who has rallied Europe, Australia, and Japan in his fight against autocracy and the promotion of democracy around the world, presents a more complex problem for Xi Jinping.

This rapprochement could prove to be one of the most important geopolitical developments in decades, in some ways the antithesis of what Nixon tried to achieve in the 1970s.

Russia and China are not natural allies and Chinese leaders have long argued for a world without formal military alliances, avoiding entanglement in other countries’ military conflicts. However, Putin and Xi have many common interests. Both men were deeply shaken by the collapse of the Soviet Union. Both have cracked down hard on dissent or circumvented presidential term limits, which should allow them to remain in power indefinitely. But above all, they share the same vision – that of the end of American hegemony – while aspiring to restore their respective countries’ role as superpowers, with the ultimate goal of recovering territories they consider to have been lost: Ukraine, in the case of Russia, and Taiwan, in the case of China.

A few hours before the opening night of the Winter Olympics in Beijing, a major event went almost unnoticed. Putin and Xi Ping issued an extraordinary joint declaration, promising that their cooperation would be “superior” to that forged between the two countries during the Cold War. This includes armaments and defence policy. China now supports Russia’s demand to stop NATO enlargement. Russia supports China’s claim to Taiwan.

But their joint statement is also a manifesto calling on the US to recognise that it is no longer the world’s policeman. The world has changed, they say. Russia and China must be respected as ‘global powers’ that can dictate what happens in their own backyard.

This confrontation with the Western world – and primarily the United States – is not just geopolitical. Indeed, the two allies of circumstance have engaged in an economic war with the US, through control of the global supply chain and energy prices. By accumulating gold and dumping US Treasuries, they are trying to strip the dollar of its status as a reserve currency.

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