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After last week’s BRICS summit, the buzz around ‘de-dollarization’ and a BRICS currency is still making the rounds in the mainstream media.

But my stance still hasn’t changed - because nothing has changed.

As I pointed out last year in the article “Is a BRICS Currency a Flawed Idea? I Think So - And Here’s Why,” BRICS nations have deep economic imbalances, such as massive surpluses, hoarded savings, and a great deal of dependence on the West to buy their exports.

Because of all this, breaking from the dollar would require a massive overhaul of their economies, and thus despite all the recent noise, I don’t see them ready for that anytime soon.

But let’s take a closer look at what BRICS did, what they want to do, and what we can expect...

The 2024 BRICS Summit - More ‘BRICS’ in the Wall

The 2024 BRICS Summit in Kazan, Russia, was essentially a get-together of Brazil, Russia, India, China, and South Africa (BRICS) - plus new members like the United Arab Emirates (UAE), Iran, and Egypt (the “+” in BRICS+). Together, they make up nearly half of the world’s population and a quarter of the global economy. This isn’t a group to ignore, and its influence is likely to grow as more nations look to join.

Here’s what they discussed:

1. Money Shifts: They aim to reduce reliance on the U.S. dollar by creating direct payment systems, hoping to avoid Western financial pressures like sanctions.
   
2. Green Goals: They pledged to “go green” with renewable energy and pollution reduction, though most BRICS countries are heavy polluters and oil producers.
   
3. Conflict Resolution: They discussed global conflicts, like Gaza and Ukraine, and agreed to collaborate on security, especially against cyber threats.
   
4. Strengthening Trade: They want more intra-BRICS trade to build economic resilience if global markets shake.

While all these points matter, I believe Money Shifts takes priority - since it’s the one that could drive the rest.

So, will BRICS challenge the U.S. dollar?

Well, it can, but it will come at a very steep cost. Specifically for China

Challenges Facing a BRICS Currency

Now, many BRICS countries may talk a big game about moving away from the U.S. dollar, but they’re not likely to do it anytime soon.

As I mentioned in last year’s article - “How A BRICS Currency Could Work, Why It Isn’t Likely, And What It Means For The Dollar” - BRICS are a mix of mostly export-driven economies.

For perspective, this year, five of the nine BRICS nations are surplus economies. And together, the surpluses add up to 3.5 times the deficits, with China alone holding 75% of the surplus³. These surpluses far outweigh what the deficit countries can absorb, leaving BRICS nations still reliant on U.S. assets (like bonds) to balance their books.

• What do I mean by “surplus,” “deficit,” and “balancing their books”? Imagine the world as a big classroom. If one student - let’s say Person A - spends more than they earn (buying more than they can afford), they’ll need to borrow from another student or get things on credit. This creates a deficit for Person A - meaning they owe someone else.
  
  Meanwhile, in this classroom, if Person A has a deficit, it means another student (or several) has a surplus – meaning they lent the money or sold items to Person A. Put simply, when one person borrows, someone else is lending; they go hand in hand and must balance out.
  
  It works the same way with countries.

So, as long as BRICS members keep running large surpluses with the West, they’re stuck relying on the U.S. market (a massive deficit nation) and the dollar (since the U.S. pays with the dollar).

Now, in an ironic twist of fate, if the U.S. were to clamp down on foreign purchases of its assets – such as preventing foreigners from buying bonds - these surplus countries would be forced to rebalance their economies and turn inwards, which could cause a lot of economic pain (as we’ve seen with China since 2021, this isn’t an easy thing to do.)

That’s why – contrary to what the mainstream believes - what Washington does with the dollar matters more to BRICS than any plans coming out of Moscow or Beijing.

Making matters more interesting, China is essentially the only country of scale in BRICS – so it would fall on their plate to do most of this rebalancing.

To emphasize this, take a look at the chart below. BRICS+ central banks hold around 40-50% of global foreign currency and gold reserves.

But here’s the catch: China’s reserves dominate (grey bar). Without China, the rest of the BRICS nations hold only a modest portion, underscoring China’s outsized influence in the bloc.

Meanwhile, hardly anyone uses BRICS currencies in international trade – such as the Russian Ruble, Indian Rupee, or South African Rand.

Why? Because progress in adopting BRICS currencies in global FX reserves remains slow, with only the Chinese yuan holding a modest 2% share over the past four years. 

I believe three main factors limit this growth:

1. BRICS+ nations have low external liabilities (since they run surpluses), thus reducing demand for their currencies and bonds abroad.
   
2. Countries rarely make loans in BRICS+ currencies, instead using widely accepted ones like the U.S. dollar. For example, A Swiss bank wouldn’t use its surplus rupees (if it had any) to make a loan to a Brazilian company. They’d use dollars.
   
3. China, which holds the majority of BRICS+ reserves lacks viable alternatives to the U.S. dollar due to the dollar’s deep and liquid markets.

Put simply, BRICS+ countries don’t owe much money to other countries, so there isn’t much need for other countries to want or use BRICS money. And then there’s China, which has most of the BRICS+ savings. China would like to use its own money (the yuan), but the U.S. dollar is just way easier for everyone to use because there’s a lot of it, and it’s much easier to trade since anyone will accept it. So, for now, everyone sticks with the dollar.

Yet it’s also important to note that the use of these currencies has risen over the last two decades and will likely continue to.

China’s Role: The Key to Any BRICS Currency - But Don't Hold Your Breath

For a BRICS currency to work, China would need to provide massive amounts of yuan as a global “liquidity spigot,” similar to how the U.S. provides and supports the global economy with dollars.

The problem? China isn’t willing to do this yet – and here are three big reasons why:

1. Free-Floating Yuan: A true global reserve currency like the dollar “floats” in value based on market demand. However, China prefers strict control over its currency to keep it cheap and boost exports.
   
2. Manufacturing Powerhouse: China’s manufacturing economy is massive, driving much of its growth, and is heavily subsidized by Beijing. Becoming a major reserve currency would essentially disrupt this model.
   
3. Crisis Support: In 2020, the U.S. provided dollar swaps to countries like South Korea, Mexico, and Brazil during a crisis. China, meanwhile, tends to lock countries into debt cycles through its Belt and Road Initiative (BRI), showing no inclination to offer broad support or forgiveness.

All go hand in hand because the more yuan China injects into the global economy, the harder it is to control the yuan - which could put its export economy at risk.

And that’s why China isn’t ready to support a BRICS currency as the key “lender of last resort”.

Case Study: China’s Belt and Road Initiative

Launched in 2013, China’s BRI aimed to expand trade and influence by funding major infrastructure across Asia, Africa, and Europe. But this $1 trillion program has also created debt traps for borrowers - and for China. Over the last three years, more than $78 billion in BRI loans have soured, forcing China to restructure or write off debts, yet rarely offering outright forgiveness. About 80% of these loans went to countries now in debt distress, such as Sri Lanka, Kenya, and Zambia, sparking defaults and IMF bailouts.

And as more of these loans enter the repayment phase, significant debt distress is expected to increase in the coming year.

This experience is a hard lesson for China on the risks of international lending. It also raises the big question: would China flood the global economy with yuan if it meant risking inflation at home? Likely not.

China isn’t even ready to support its closest allies with yuan – such as Russia.

Thus, without the yuan being suggested as a BRICS+ payment option – it shows the harsh reality for those pushing to “de-dollarize”.

Closing Thoughts

In short, a BRICS currency isn’t realistic in today’s world since BRICS nations themselves aren’t ready for it. So, keep this all-in mind when you hear any hype about it. And remember, for now, that’s all it is – hype.

But regardless, BRICS’ influence will likely keep growing, with more countries gravitating toward membership - creating both winners and losers.

In the next issue of Morning Pour, I’ll dive into the potential upside of BRICS and emerging markets.

You won’t want to miss it.

Source:

1. What happened at the BRICS summit? | Reuters
2. Why not all the Brics players back Russia’s bid for a de-dollarised world | South China Morning Post
3. De-dollarisation: More BRICS in the wall | articles | ING Think
4. China hit by surge in Belt and Road bad loans
5. Bloomberg New Economy: The Limits in China’s ‘No Limits’ Russia Partnership - Bloomberg