‘China’s Foreign Exchange Reserves: Past and Present Security Challenges’ (中国外汇储备的前世今生和当前面临的安全挑战) was originally published in China Reform (中国改革), issue no. 4 (July 2022).

On 28 February 2022, the United States and its allies announced the freezing of $300 billion in foreign exchange reserves of the Central Bank of the Russian Federation. At that time, China’s foreign exchange reserves totalled roughly $3.3 trillion, including more than $1 trillion in US Treasury bonds.^[1] The US’ weaponisation of foreign exchange reserves has forced China to re-examine the safety of its foreign exchange reserves and overseas assets.

The security of China’s foreign exchange reserves is not only an international financial issue but also a geopolitical and asset management issue. What specific measures should China take to ensure the security of its foreign reserves? To completely answer this question is beyond this author’s ability. Rather, this article only attempts to put forward a rough outline of the origin of China’s foreign exchange reserves, the challenges faced in the current period, and how to remedy the situation from the perspective of international finance.

From the Gold Standard to the Post-Bretton Woods Era

Inter-country debt is repaid through the transfer of certain internationally accepted means of settlement, such as gold, international reserve currencies, or special drawing rights (SDRs). International liquidity is the stock of these means of settlement. Countries that issue international reserve currency (i.e., the United States) can provide international liquidity or international reserves to other countries through the capital account deficit or current account deficit.^[2] Under the Bretton Woods system, where the US dollar was pegged to gold, the United States provided international liquidity or international reserves for other countries through the capital account deficit. From 1945 to the beginning of the 1950s, Europe and Japan were in dire need of importing goods from the United States but were unable to obtain enough US dollars through exports and because of the severe global ‘dollar shortage’. In the 1960s, the European and Japanese economies were revitalised, and the balance of trade improved.

Meanwhile, due to the overheating of its domestic economy and its decline in international competitiveness, the US experienced a decrease in its goods trade surplus and an increase in its services trade deficit (including overseas military spending). At the same time, due to higher interest rates in Europe, US capital flowed into Europe in large quantities, bypassing controls and forming the European dollar market; the US capital account deficit increased rapidly. From the perspective of Europe and Japan, while their trade deficits were decreasing, there were still large inflows of US dollars, and so their US dollar foreign exchange reserves increased rapidly. The ‘dollar shortage’ turned into a ‘dollar glut’. From the point of view of the US, its trade surplus almost disappeared (with some countries, the US was already in a deficit), while its capital deficit increased so much that, to use the terminology of the time, the US international balance of payments deteriorated sharply.

The intention behind pegging the US dollar to gold was to reassure dollar-holders that although the US dollar was a fiat currency printed by the United States with no inherent value, it could be exchanged for gold at a given rate. Thus, they could hold US dollars with trust. For the US, under the gold exchange standard, the international imbalance of payments resulted in the loss of US gold reserves. While the gold may have remained in US vaults, it was no longer owned by the US. Foreign central banks could always convert excess US dollars into gold, and ship the gold back to their countries. By 1971, the US held just over $10 billion in gold reserves, compared to the more than $40 billion and $30 billion held by foreign officials and private individuals, respectively. Eventually, the United States could no longer afford to keep the promised exchange rate of $35 per ounce of gold. On 15 August 1971, US President Richard Nixon announced the closure of the ‘gold window’. The Bretton Woods system collapsed.

However, the inherent contradiction of using a country’s fiat currency as an international reserve currency has not disappeared under the post-Bretton Woods system. As the anchor of the international monetary system, the US dollar must remain stable. This stability is multidimensional; for example, its purchasing power should be stable. On the one hand, the US dollar has to play the role of a global public good and should serve the global interest. On the other hand, the US dollar is printed by the US government. Whether the real purchasing power of the US dollar can remain stable depends fundamentally on the domestic policy of the US government, which has no obligation to sacrifice its national interests for the global public interest.

In the post-Bretton Woods era, since the United States is no longer an overwhelmingly dominant economic power, the contradiction between the US dollar’s status as a national currency (serving US interests) and its status as an international reserve currency (serving global interests) manifests itself in the fact that the US has to provide the world with international liquidity, or a reserve currency, primarily through current account deficits (trade deficits). As the world’s gross domestic product (GDP) grows, so does the international reserve currency required for global trade and financial transactions. The more reserve currency the US provides to the world, the larger the US trade deficit must be. To put it another way, the United States provides global reserve currency through IOUs. The growth of the global economy requires the US to issue more IOUs, and the more IOUs issued, the more foreign debt the US holds. However, economists did not expect that despite the US having a huge net debt, its balance of payments on investment income would be positive. Not only does the US not have to pay interest, but it also collects a lot of it. The fundamental reason why the US dollar has remained stable – even though the US is the world’s largest debtor – is that the rest of the world’s demand for the US dollar as a reserve currency has also been increasing, which means that other countries are willing to lend money to the US and are willing to finance the US trade deficit. In this way, the gap between domestic investment and savings within the United States is made up by foreign savings, and the pressure of inflation and US dollar depreciation is greatly reduced. If there had not been a strong demand for US dollar foreign exchange reserves in other countries while the US was indiscriminately issuing dollars to make up for its lack of domestic savings, the US dollar would have collapsed long ago.

Since the subprime mortgage crisis in 2008, the United States has implemented extremely expansionary fiscal and monetary policies. The strong demand for US Treasury bonds and other US assets by foreign governments and investors has created the necessary external conditions for low inflation and faster growth in the US for more than ten years. However, the US has accumulated net foreign liabilities of $14 trillion (2020) and a national debt of $28 trillion (2021), with ratios to GDP of roughly 67 percent and 122 percent, respectively.^[3] The situation is only continuing to deteriorate. According to the US Congressional Budget Office, the US national debt-to-GDP ratio will surpass 200 percent by 2051.^[4] The US government has acknowledged that its fiscal situation is unsustainable.

No one knows how long investor confidence in the US dollar and US Treasuries can be maintained in the face of the country’s worsening debt situation. No one knows when the market will lose confidence in the US dollar and it will collapse. But would it not be prudent to factor that possibility into decision-making?

Implications of the US Freezing Russia’s Foreign Exchange Reserves

Following the outbreak of the Russia-Ukraine conflict, the United States froze $300 billion in foreign exchange reserves of the Russian Central Bank within 72 hours. This has seriously undermined the international credibility of the US and shaken the credit foundation of the Western-dominated international financial system. Which country can be sure that the US will not freeze its foreign exchange reserves similarly in the future? The US’ weaponisation of foreign exchange reserves has exceeded the worst estimates of economists about the security of China’s foreign exchange reserves. The value of China’s foreign exchange reserves will not only suffer losses due to US inflation, dollar depreciation, and falling treasury bond prices or defaults but they may be wiped out instantly for geopolitical reasons.

Will the United States take such extreme actions against China’s foreign reserves? As early as 2013, Martin Wolf, chief economics commentator for the Financial Times, wrote that the US could well freeze China’s foreign exchange assets in the event of a conflict.^[5] While both sides would suffer heavy losses, China’s losses would be even heavier. One question that China may soon face is whether it should join the embargo on Russian oil and gas and comprehensive financial sanctions against Russia. So far, the US has not imposed a comprehensive oil and gas embargo on Russia, and China and India are still allowed to buy Russian oil and gas. However, once the US believes that Europe can be rid of its dependence on Russian oil and gas, it may then point its finger at China and India. China’s continued purchase of Russian oil and gas will likely become a reason for the US to act against China’s foreign reserves or impose sanctions on Chinese financial institutions.

China’s Massive Foreign Exchange Reserves and Countermeasures

China has accumulated its massive foreign exchange reserves over a long period of time, through ‘double surpluses’ – current account surplus and capital account surplus. By any standard, China’s holdings of $3.3 trillion in foreign exchange reserves (excluding Hong Kong’s $496.8 billion and Taiwan’s $548.4 billion) far exceed the internationally recognised reserve adequacy requirement; the second, third, and fourth largest foreign exchange reserve holders in the world are Japan, with $1.3 trillion; Switzerland, with $1 trillion; and India, with $569.9 billion.^[6] There are only three countries in the world with foreign exchange reserves of more than one trillion US dollars (China, Japan, and Switzerland), and China’s foreign exchange reserves are nearly three times that of Japan, which is ranked second.

Since the rate of return on foreign exchange reserves is extremely low, if the proportion of foreign exchange reserves in overseas assets is too high, the overall rate of return on overseas assets will inevitably be too low. Of China’s $9 trillion in overseas assets, reserve assets account for 37 percent of the total; of these reserve assets, US Treasury bills account for 32 percent.^[7] It should be noted that, to improve the rate of return on foreign exchange reserves, the State Administration of Foreign Exchange, an administrative body of the People’s Bank of China, and other relevant agencies have taken into account not only safety and liquidity but also the rate of return in their asset allocation. In addition to treasury bills of the United States and other countries, China’s reserve assets also include bonds of international organisations, local government bonds, private equity investments, and policy investments such as the Belt and Road Initiative (BRI). These efforts should be productive. However, in any case, because of the safety and liquidity requirements of foreign reserves, an overproportion of foreign reserves in overseas assets will inevitably lead to lower income from overseas assets. Not only that, a large proportion of China’s foreign exchange reserves is ‘borrowed’ through the introduction of foreign capital rather than ‘earned’ through the trade surplus. Compared with the investment income of foreign reserves, the debt cost of ‘borrowed’ foreign exchange reserves is extremely high. A 2008 survey conducted by the World Bank office in Beijing showed that the investment income of US enterprises in China is 33 percent compared with 22 percent for foreign enterprises in general. At the same time, the investment return on US Treasury bills was less than 3 percent. This situation is also one of the reasons for China’s negative investment returns despite its $2 trillion in net overseas assets. China’s balance of payments and overseas investment position is in stark contrast to that of the United States. As mentioned, the latter will have nearly $200 billion in investment income in 2021 despite being a $15 trillion net debtor. Looking around the world, Argentina and Russia are the only countries in the same boat as China.

In the early days after China’s opening up, the shortage of foreign exchange was the main bottleneck to the country’s growth. Although there was partiality and overreaction, it was ultimately the right step for China to develop processing trade vigorously to earn foreign exchange, actively introducing foreign direct investment and drastically devaluing the Chinese renminbi (RMB) in one go. However, after the Asian financial turmoil in 2003, China, due to ‘appreciation phobia’, delayed the slight appreciation of the RMB until 2005. The consequence of this is that, on the one hand, China’s trade surplus increased sharply, and, on the other hand, the domestic asset bubble and the strong expectation of RMB appreciation led to a large inflow of ‘hot money’. China’s capital account surplus once exceeded the trade surplus and became the primary source of new foreign exchange reserves. It is fair to say that China’s failure to let the RMB appreciate in time and its lack of exchange rate flexibility were the conditions that led to the country’s excessive accumulation of foreign exchange reserves.

The principal purposes for restructuring China’s overseas asset-liability structure and balance of payments structure should be twofold. First, to improve the structure of China’s overseas assets-liabilities and to increase the return on its net overseas assets. To this end, China should reduce the share of foreign exchange reserves in its overseas assets. Second, to improve the safety of China’s overseas assets, especially its foreign exchange reserves. Under current conditions, China should reduce its stock of foreign exchange reserves to at least the internationally recognised level of foreign exchange reserve adequacy. How much foreign exchange reserves should a country hold? In general, this depends on the size of the country’s imports (or exports), the size of short-term foreign debt, the size of other securities liabilities, and the broader money supply (M2).^[8] At the same time, it is also necessary to consider the country’s exchange rate regime and capital controls. For example, if the country has a floating exchange rate and capital controls, the country’s foreign exchange reserve adequacy ratio can be significantly reduced.

The possibility of the United States freezing and seizing China’s overseas assets cannot be ruled out. However, the greater likelihood is that the US will act against China by using its Specially Designated Nationals (SDN) list to target individuals and entities with sanctions (akin to the now defunct Part 561 List sanctions against Iran). To deal with this possibility, China needs to improve its financial infrastructure. For its existing stock of foreign exchange reserves, measures that China should consider include:

1. Increasing holdings of other forms of assets while reducing US Treasuries holdings. In the past, arguments have been made in favour of currency diversification of China’s foreign exchange reserves (towards the Euro and Japanese yen) due to concerns about the depreciation of the US dollar. However, under the current geopolitical conditions, such diversification may not be sensible.

2. Accelerating the construction of financial infrastructure – such as settlement, clearing, and messaging systems – that is independent of the US. Make full use of China’s technological reserves and strength in the field of digital technology to improve the cross-border payment system that adapts to the new trend of digital trade.

3. Reducing US Treasury bills holdings in accordance with market rules. In recent years, it has been reported that central banks in many countries have been selling US Treasury bills. Such trading activities are purely commercial, so the US should have no grounds to object.

What Role Can RMB Internationalisation Play?

As the international geopolitical situation has deteriorated, RMB internationalisation has once again become a hot topic. In 2008, the US subprime mortgage crisis erupted, and the bankruptcy of Fannie Mae and Freddie Mac, which held large amounts of US Treasury and government agency debt, caused great anxiety in the Chinese government. In 2009, Zhou Xiaochuan, then governor of the People’s Bank of China (PBOC), the country’s central bank, proposed that SDRs replace the US dollar as the international reserve currency. However, this proposal was aborted due to the opposition of the United States. So, China found another way to reduce the risk of its overseas assets: internationalising the RMB. However, the process of RMB internationalisation would be hindered as the expectation of RMB appreciation turned to depreciation. For some time after 2015, China had to tighten capital controls due to serious capital outflows and flight.

Yi Gang, who succeeded Zhou as governor of the PBOC, stressed on several occasions that ‘RMB internationalisation should be market-driven, and the central bank will not take the initiative to promote it’.^[9] Governor Yi’s assertion is correct and in line with the historical experience of RMB internationalisation to date. In fact, from 2009 to 2014, detailed and thorough discussions were held on the benefits and costs of RMB internationalisation and the roadmap for China to follow in both domestic and overseas economic spheres. These ideas have since been tested in practice. For example, when China pushed for RMB import settlement in the past, the US dollar was replaced by the RMB to pay for imports when China had a large current account surplus and, as a result, China’s foreign exchange reserves in US dollars increased rather than decreased. As another example, it was hoped that non-residents would increase their holdings of RMB deposits and RMB treasury bonds in large quantities, but after the expectation of RMB appreciation disappeared in 2014, the interest of non-residents in holding RMB deposits and other RMB assets largely disappeared as well. Experience tells us that while RMB internationalisation is a worthy cause, the process must be market-driven. China should not prioritise short-term benefits or instant gratification, nor should it try to help young shoots grow by dragging them up.

Whenever possible, the buyer’s or seller’s advantage should be used to advance RMB-denominated pricing and settlement. For example, China is the largest buyer of many commodities, and it would undoubtedly benefit China if these commodities were denominated in RMB. Driven by the market, the internationalisation of the RMB has indeed made solid, if not spectacular, progress. On the whole, the RMB’s emergence as an international currency, and in particular an international reserve currency, could bring enormous benefits to China.

In general, however, RMB internationalisation should not be given priority over commercial considerations. For example, when a Chinese investor buys a foreign bond in the international capital market, the currency in which the bond is denominated and settled is determined by the market. For Chinese investors, if the RMB is on a long-term appreciation path, it is preferable for the bond to be denominated in RMB rather than US dollars; meanwhile, where a Chinese company is in a debtor position, it is preferable for the bond to be denominated and settled in a depreciating currency. China also needs to promote the internationalisation of its capital markets. However, the purpose of such promotion, especially the bond market, is not to internationalise the RMB but to improve the efficiency of China’s financial resource allocation. The market knows best what is going on at the micro level. The choice of currency in trade and financial transactions should be left to the discretion of enterprises and financial institutions. As China’s economic strength grows stronger and its financial markets become more sophisticated, the RMB will naturally be chosen more and more as the international currency of denomination and settlement.

The highest level of RMB internationalisation is for the RMB to become a reserve currency for other countries. The RMB can be supplied to other countries through current account deficits and capital account surpluses; China pays for its trade deficit in RMB, and the central bank of the country with a trade surplus acquires and holds the RMB in the foreign exchange market, using the RMB to buy Chinese treasury bonds or certain safe and liquid Chinese bonds. In this way, the RMB becomes the surplus country’s reserve currency. China, in turn, can use the RMB’s status as an international reserve currency and a credit note to gain access to resources.

China can also promote the RMB as a reserve currency through capital exports. Generally speaking, when China provides RMB to other countries through capital export, the capital-importing country will use these RMB to import goods from China and the RMB will flow back to China. The capital-importing country will record a Chinese trade deficit and an equivalent capital account surplus on its balance of payments statement, but its foreign exchange reserves will not increase as a result. If the country does not use the RMB to purchase Chinese goods, the RMB may flow out of the country through the capital account, or it may be sold to the country’s central bank and used to purchase Chinese treasury bonds or other safe and liquid financial assets, thus forming the country’s foreign exchange reserves.

However, for the recipient countries of Chinese capital exports, these RMB foreign exchange reserves would be borrowed from China, not earned through export surpluses. Importing capital from China and not using it to buy Chinese goods and services, but rather to hold short-term Chinese capital with low returns may be a misallocation of resources. As a result, the recipients of Chinese capital exports will minimise this portion of RMB foreign exchange reserves. In other words, while China may provide other countries with RMB through capital exports, the willingness of other countries to convert the corresponding RMB into Chinese short-term bonds or treasury bonds (if the latter are available) – thereby forming these countries RMB foreign exchange reserves – may be limited.

In short, for the RMB to become an international reserve currency, China must fulfil a series of preconditions, including establishing a sound capital market (especially a deep and highly liquid treasury bond market), a flexible exchange rate regime, free cross-border capital flows, and long-term credit in the market. In short, China must overcome the so-called ‘original sin’ in international finance and be able to issue treasury bonds internationally in RMB.^[10] Otherwise, it will be difficult for the RMB to become an international reserve currency and RMB internationalisation will remain incomplete.

Can RMB internationalisation enhance the security of China’s foreign exchange reserves? If this question is considered in the context of a complex global economic system, the answer should be yes. However, in the short term and in terms of direct impact, even if China’s foreign exchange reserves consisted entirely of RMB assets, their security would not change substantially. There are more than $1 trillion worth of US Treasury bills among China’s foreign exchange reserves. If the United States does not intend to repay the principal and interest according to the original agreement, what can China do? Nothing. Suppose the US Treasury issues 7 trillion RMB in treasury bonds and China owns 7 trillion RMB instead of $1 trillion in foreign exchange reserves by buying this US-issued RMB bond; if the US does not intend to make debt service payments on US Treasuries that are agreed to be denominated in RMB, the dilemma that China faces will remain the same as if the assets are denominated in US dollars. Because the key to the problem does not lie in the currency that China’s foreign exchange reserves are denominated and settled in, but in whether China owes the United States money or vice versa. Regardless of their denomination and settlement, China’s foreign exchange reserves are US debt to China. It is money that the US owes China. Thus, the safety of China’s foreign exchange reserves depends on whether the US will honour its debt-servicing commitments and, should it not, whether China can compel the US to do so. If China cannot ensure that the US will not renege, it has no choice but to gradually reduce its foreign exchange reserves. Of course, denominating and settling certain transactions (e.g., imports) in RMB can lead to a reduction in foreign exchange reserves, thus strengthening the security of China’s foreign reserves in an indirect sense. It is interesting to note that in early December 1950, when the US announced a severe ‘blockade’ and ‘embargo’ against China, China endeavoured to ‘snatch’ and ‘buy’ goods from Western countries. By the time the United Nations passed the embargo resolution against China in 1951, China had used up all its foreign exchange savings.

In short, while RMB internationalisation is a goal worth pursuing, it is a long-term process; distant water will not quench immediate thirst. In the face of geopolitical challenges, RMB internationalisation will also have a limited effect in protecting China’s existing overseas assets.

What China can now do to address the challenges with its foreign exchange reserves is to ‘mend the fold’; in other words, it is better to act late than never. As one of China’s greatest poets, Tao Yuanming (365–427 CE), wrote, ‘Knowing that what I did in the past cannot be redressed, I can still retrieve my mistakes in the future’. The key is to properly understand and implement the strategic policy of fostering a new development paradigm with domestic circulation as the foundation and domestic and international circulation reinforcing each other. Doing so will accelerate the transformation of China’s development strategy, realise the turn towards domestic circulation, and consolidate domestic demand as the driving force of economic growth.

The British economist John Maynard Keynes once said, ‘If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has’. In the current perilous geopolitical environment, if a country cannot safeguard its rights as a creditor, it should strive to avoid becoming a creditor as much as possible. In the face of potential US financial sanctions in the near future, China’s decision-making authorities must analyse various possible scenarios and develop preventive and responsive countermeasures.

Bibliography

Author’s Notes

‘What Is Driving the BRICS’ Debate on De-Dollarisation’ (金砖国家高调协商“去美元化”的背后) was originally published by Wenhua Zongheng (文化纵横) as a New Media special feature (January 2024).

Ahead of the 2023 BRICS summit in Johannesburg, South Africa, there was much discussion amongst the member countries about whether negotiations would take place at the meeting regarding the development of a BRICS currency and the acceleration of de-dollarisation, that is, the promotion of currency cooperation and reduction in the use of the US dollar. In the end, the country leaders did not specifically discuss the issue of a BRICS currency but passed a resolution on expanding the organisation’s membership. Nonetheless, from both historical and realist perspectives, it is in the interest of the BRICS countries to promote de-dollarisation.

The Impact of US Dollar Hegemony on the BRICS Countries

Historically, the core BRICS countries have suffered from the hegemonic role of the US dollar. Throughout its history, Brazil has been exploited by British and US capital, with various methods of profiteering having emerged. After the collapse of the Bretton Woods system, the US dollar has floated freely. Any substantial appreciation or depreciation of the US dollar has spelled disaster for Brazil. US capital has also been able to enter and exit the Indian stock market freely, bidding up prices of certain stocks and then short-selling them. This has brought about huge fluctuations in the Indian stock market and caused some important Indian companies to suffer from excesses and shortages of capital liquidity.

Meanwhile, South Africa, Russia, and China have been subjected to US financial sanctions. The US has imposed fines and sanctions on South African financial firms for alleged money laundering and violations of economic sanctions that the US has enacted against other countries. There are countless examples of US sanctions against the Russian government and various Russian companies. After the war in Ukraine broke out, the United States froze and confiscated the US dollar assets held by several wealthy Russian citizens, and also froze $300 billion in assets of the Russian Central Bank and threatened to confiscate them to subsidise Ukraine’s war effort. Of course, because Russia has threatened to retaliate in kind and confiscate Western assets in Russia, this has not escalated beyond a ‘war of words’.

In the past, the United States has accused China of being a currency manipulator because of its significant holdings of US dollar assets and once imposed sanctions on China based on the allegation that China’s sharp increase in exports was due to manipulation of the RMB exchange rate. However, it is the US that disproportionately benefits from this relationship. On the one hand, the US imports a large number of manufactured products from China, benefiting from cheap goods to lower its inflation rate; on the other hand, China earns a large amount of US dollars but has no place to invest them, and so has no choice but to purchase US treasury bills, thereby providing the United States with cheap capital. Despite this double victory, the US wishes to exert further pressure on China. As such, the US falsely complains of China’s so-called exchange rate manipulation; in reality, the US wants to force China to accept RMB appreciation and open its financial market, thereby creating an imported financial asset bubble. Thus far, these efforts have been wasted, as China has not yielded to US pressure.

In addition to the core BRICS countries, the organisation’s new members have also experienced many entanglements with the US dollar. Saudi Arabia, the United Arab Emirates, and Iran are all producers and exporters of oil and natural gas. In 1971, amid the US dollar crisis, then US President Richard Nixon closed the window for the free convertibility of US dollars into gold so that the US dollar could depreciate sharply. The US dollar is the principal pricing currency for oil, and its depreciation caused oil prices to skyrocket. At that time, oil-producing countries did not have the ability to extract and refine oil. Oilfield development was managed by British and US oil companies, which only paid the oil-producing countries an annual fixed extraction fee priced in US dollars. With the US dollar depreciating and oil prices skyrocketing, the distribution of profits became unfair. The oil-producing countries demanded a new arrangement, but the British and US oil companies refused. After the outbreak of the Arab-Israeli War in 1973, the oil-producing countries jointly launched an oil embargo against Israel and its allies. Only after the first oil shock did the oil-producing countries regain their bargaining power vis-à-vis Western oil companies.

The US Dollar Has Impeded International Cooperation

In an era where the world is moving towards a multipolar order, the hegemony of the US dollar has hindered international cooperation between many countries. Since its ‘war on terror’, the United States has discovered that, compared with traditional trade wars, it is much more effective to use the hegemony of the dollar to impose financial sanctions on countries that violate the US-led ‘rules-based order’. This logic was detailed by Juan Zarate, a former US official under the administration of George W. Bush, in his 2013 book Treasury’s War: The Unleashing of a New Era of Financial Warfare. In recent decades, the US has frequently used the dollar as a weapon to impose financial sanctions on countries that it does not like.

The United States relies on its domestic laws to justify imposing sanctions on foreign companies and governments around the world, a practice known as ‘long-arm jurisdiction’. On top of this, if non-sanctioned actors do not follow US sanctions against a country and dare to defy Washington’s will, they too may become targeted by secondary sanctions. The US dollar settlement system has become an instrument that the US uses to determine who has complied with or defied its bans on doing business with sanctioned countries and to impose costly sanctions on those who are not compliant. The US government has fined many European banks billions of dollars for alleged violations of US sanctions.

In recent years, there have been a growing number of cases in which the United States has abused the use of financial sanctions. As a result, countries with large amounts of US dollar financial assets have developed concerns about the long-term security of their holdings. The case of Iran is instructive. The Iran nuclear agreement was reached in 2015 between Iran and the permanent members of the United Nations Security Council – the United States, the United Kingdom, Russia, France, and China – as well as Germany and the European Union. Under this framework, all nuclear-related economic sanctions against Iran would be lifted, and the country could engage in greater international cooperation. Following the deal, European-Iranian cooperation progressed smoothly, with many European companies strengthening their ties with Iran and conducting settlements in euros. However, after Donald Trump came to power in the US, he abolished the Iran nuclear agreement, re-imposed sanctions on Iran, and forced European companies to withdraw from the Iranian market. These practices ignited fears in many Middle Eastern countries about their future fate. Historically, the US provided security guarantees to many countries in the region, with these countries obliged to purchase large amounts of US financial assets to provide the United States with cheap capital. If relations between Iran and Arab countries in the Middle East were to improve and US ‘security’ was no longer needed, would these countries continue to purchase so many US dollar assets? Washington’s blatant announcement that it would confiscate Russia’s US dollar assets following the outbreak of war in Ukraine has only intensified concerns among Arab countries. Unlike Russia, these countries do not possess nuclear weapons, nor can they match Russia’s military capabilities. If the US were to use its ‘long-arm jurisdiction’ to freeze or confiscate their US dollar assets, they would have no power to fight back.

These experiences pose important questions for BRICS countries, many of which have been subject to varying degrees of US sanctions. If the BRICS countries cannot develop a settlement mechanism other than the US dollar for cross-border cooperation, many more countries may be targeted by US sanctions in the future.

Likewise, despite the successes of the Belt and Road Initiative (BRI) that China launched ten years ago, many Global South countries have fallen into the US dollar trap again. This is because the US Federal Reserve sharply raised interest rates in 2023, which caused capital flight in these countries and made their dollar debt interest rate unserviceable. De-dollarisation is the only choice to ensure the BRI’s continued success in the future.

The US Dollar Carries Significant Financial Risks

Even from the perspective of financial asset protection, it is risky for any country to hold too many US dollar-denominated assets. This risk is inherent to fiat money. In the era of precious metals, the basis for issuing currency was precious metal reserves. If there was too much outflow of gold and silver, it would cause a currency crisis. After the collapse of the Bretton Woods system, the last bastion of the gold standard was destroyed and the world entered the age of fiat money. The basis of legal currency is government credit; in other words, government debt is the basis of currency. The more debt the government issues, the more currency flows into the market. However, the level of government debt must match the government’s fiscal revenue and the debt must match the size of the economy. Otherwise, debt sustainability cannot be guaranteed and a debt crisis will erupt. The debt crisis will destroy the confidence of currency holders, thus triggering a currency crisis.

Since the beginning of the twenty-first century, US government debt has climbed beyond any historical record. When George W. Bush left office, US government debt exceeded $10 trillion; when Barack Obama left office, US government debt had climbed to $20 trillion; during Donald Trump’s four years in power, US government debt rose to $26 trillion; finally, in the three years of the current administration of Joe Biden, US government debt has exceeded 34 trillion. In 2020, the ratio of US government debt to gross domestic product surpassed 130 percent. As the Federal Reserve has raised interest rates, interest rates on US Treasury bills have risen rapidly. In 2024, the US government’s interest payments on the national debt will exceed $1 trillion, exceeding the official military budget.^[1] Such a high level of debt raises concerns that the US government will default sooner or later.

Following the 2008 international financial crisis, US economists Carmen M. Reinhart and Kenneth S. Rogoff published This Time Is Different: Eight Centuries of Financial Folly (2009). The book reveals a profound historical truth: when the debt burden of sovereign countries has become too heavy, all of them, without exception, have relied on inflation and currency devaluation to write off their debt and escape the crisis. When the US government’s debt reaches such a high level, does anyone still believe that it will be able to escape this historical fate?

In fact, the US government has a long history of breach of contract. In 1971, US debt skyrocketed and the US dollar was in crisis. President Nixon decided to decouple the US dollar exchange rate from the price of gold. The US dollar depreciated sharply, and the Bretton Woods international financial system collapsed. The background of that US dollar default was the Vietnam War. The rising military expenditures of the United States for the war and the sharp increase in debt caused by the fiscal deficit caused Western European countries to lose confidence in the US dollar. Similarly, after the outbreak of the war in Ukraine, the US continued to allocate funds to provide military aid to Ukraine. The US budget deficit also continued to rise, the financial burden continued to increase, and the national debt quickly exceeded the ceiling set by Congress. Negotiations between the Biden administration and Congress to raise the debt ceiling have become a perennial fixture on the US political scene. Since October 2023, the US has become involved in yet another ‘proxy war’, supporting Israel’s military campaign in Gaza with increasing military expenditures. As the US participates in two simultaneous ‘proxy wars’, one is left to ask, how long can the US government finance its military excursions?

We can see that there are many reasons for the BRICS countries to choose to strengthen monetary cooperation and accelerate the de-dollarisation process. The development of modern communications and settlement technologies, such as blockchain, has also provided a safer path for BRICS countries to de-dollarise.

History Serves as a Mirror to Illuminate the Direction of Future Development

Although the BRICS countries are eager to de-dollarise, how can they achieve this goal? Historical experience can provide us with certain insights. After the collapse of the Bretton Woods system in the 1970s, the depreciation of the US dollar caused global inflation. Although the value of the US dollar has become unstable, it remains the most used currency in the world due to inertia in currency use. When many countries are accustomed to using a certain currency in international trade and cross-border investment, they are less willing to change their habits. In addition, after the first oil crisis, then US Secretary of State Henry Kissinger engaged in ‘shuttle diplomacy’, continuously visiting the oil-producing countries of the Middle East. Eventually, he convinced Saudi Arabia to set the US dollar as the only currency for oil pricing and Saudi Arabia, in turn, persuaded other oil-exporting countries to do the same. The United States has given these countries, which hold large amounts of US dollars, the financial privilege of directly purchasing US treasury bills in the primary market. The oil-producing countries in the Middle East have embraced the idea, and it has been extremely profitable. The trading of oil futures is the world’s largest commodity market; once oil was priced in US dollars, a huge demand was created. Other commodity futures trading immediately copied the oil futures market and used US dollars to price. In this way, the demand for US dollars became increasingly important.

The US dollar ascended to the position of the world’s largest reserve currency and trading currency. However, as the US dollar lost its anchor of gold, its face value became unstable. The appreciation or depreciation of the US dollar has caused large price fluctuations in the commodity futures market and had a significant impact on other importing countries. In this context, western European countries created the European Monetary System in 1979 in response to the US dollar crisis. Initially, they chose to float their currencies together against the US dollar, within a certain limit, a system known as the ‘floating snake’. However, because the US dollar continued to depreciate, this system could not solve the problem of inflation imported from the United States. After a period of practice, western European countries found that West Germany had the lowest inflation rate, so the value of the Deutsche Mark was the most stable. Consequently, the Deutsche Mark was used as the anchor currency of the European Monetary System, to which the currencies of other western European countries were pegged. Through this practice, western European countries introduced anti-inflation factors from West Germany, and inflation within the European Community countries stabilised.

Today, the United States is facing a similar crisis. Currency cooperation among the BRICS countries also requires them to find an anchor currency other than the US dollar. Together, the BRICS countries possess the world’s largest resource and energy reserves and the most extensive manufacturing capabilities. The exchange of industrial production and resources can be realised through a non-US dollar settlement system. As long as the BRICS countries establish a non-US dollar settlement system, their economic development will be free from the negative impact of the US dollar’s fluctuations. However, the currencies of most BRICS members are still, more or less, pegged to the US dollar, and their exchange rates are also unstable. If the BRICS countries want to engage in currency cooperation, the unstable exchange rates between their currencies will be a major obstacle to overcome. Will the BRICS countries choose the RMB as their anchor currency? As the inflation rates in the United States and Europe are already high, their central banks constantly raise interest rates to curb inflation, but the effect is not ideal. By contrast, in China, the inflation rate has been very stable and low for quite a long time, and people instead speak of the threat of deflation. Therefore, as a currency, the purchasing power of the RMB is guaranteed, especially due to China’s strong manufacturing capabilities, which may meet the demand for a wider range of industrial manufactured products.

The BRICS countries are representatives of the collective rise of the Global South. If the BRICS countries can successfully carry out monetary cooperation and overcome the constraints of the US dollar, more and more Global South countries will participate in this monetary cooperation mechanism in the future. The global financial system will be transformed, constituting an important aspect of the ‘great changes unseen in a century’.

Author’s Notes

‘From De-Risking to De-Dollarisation: The BRICS Currency and the Future of the International Financial Order’ (从去风险到去美元化：金砖货币与国际金融秩序的未来) was originally published in Wenhua Zongheng (文化纵横), issue no. 5 (October 2023).

‘De-risking’ is replacing ‘decoupling’ as the key word to describe today’s international political and economic hotspots. Western countries are emphasising de-risking trade and investment with China at the level of supply chains, while non-Western countries are de-risking their economic ties with the West in response to Western-led economic sanctions against Russia, enacted after the outbreak of the Russia-Ukraine war. The refusal of developing countries to align with Western policy on the war and sanctions against Russia has led to increasing discourse on the Global South’s political role on the international stage. The Global South’s rising economic and political influence was highlighted at the 2023 BRICS summit in South Africa, where Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates (UAE) were invited to join the organisation, amid dozens of applicants. The BRICS grouping appears set to become a significant international political and economic platform representing the interests of the Global South, a development that will profoundly reshape the international order.

Western economic sanctions against Russia have significantly impacted the developing economies of the Global South in three main respects. First, Western energy sanctions and decoupling from Russia have disrupted the relatively stable, long-standing supply-demand relationships in the international energy market. When Russian-European energy cooperation ceased, the Russian energy industry was forced to turn to the Asia-Pacific market, exporting oil and gas at low prices. Russia’s strategic response has, in turn, placed a lot of pressure on other energy producers, driving fierce competition in the Asia-Pacific market. This competition is altering the geopolitical landscape and the international political and economic balance of power. Second, Western economic sanctions against Russia have led to restructuring of the global supply chain. The withdrawal of Western companies and suppliers from the Russian market has forced Russia to find new sources of numerous goods and components, providing important commercial opportunities for non-Western firms to enter the Russian market. Third, Western financial sanctions have frozen Russia’s foreign exchange reserves and confiscated the assets of some wealthy Russian citizens. These measures have triggered concerns in many countries about the risk of holding dollar-denominated assets, prompting them to transfer these assets away from developed countries and to actively seek alternatives to the US dollar, thus becoming a key driver of the current de-dollarisation trend.

This paper examines three aspects of the de-risking efforts of the Global South and explores their impact on the future development of the international economic order. First, the de-risking efforts of the Global South are epitomised by de-dollarisation. Countries of the Global South are attempting to reduce their use of the dollar in international trade by strengthening monetary sovereignty and national economic security. This movement is separating the international trading system from the international financial system, which since the end of the Second World War, has been tightly linked by the key currency, the US dollar. In the past, the US dollar, as the reserve currency of countries in the international financial system, was used not only for commodities’ pricing but also for cross-border trade settlements and inter-bank lending, greatly enhancing the efficiency and convenience of settlements in the multilateral trading system governed by the General Agreement on Tariffs and Trade (GATT) and the World Trade Organisation (WTO). However, the West’s weaponisation of the US dollar has prompted Global South countries to pursue local currency settlements, a dynamic that will likely upend the dollar-dominated system of international trade settlements and payments, weaken or even end the dollar’s status as the key global currency, and reshape the international financial order.

Second, although many in the de-dollarisation debate advocate for replacing the US dollar with the Chinese renminbi (RMB) as the new key global currency, this is unlikely to happen in the short term. Most supporters of RMB settlements are large energy exporters with large trade surpluses with China. Although the internationalisation of the RMB is set to take off in the future, unless the weaponisation of the US dollar intensifies or the credibility of the US dollar is destroyed by a severe debt crisis in the US, it is unlikely that the RMB will replace the US dollar in the short term due to various objective conditions. In the present period, it is more likely that the dollar’s global status will be weakened by the various de-risking efforts of the Global South countries and that the international financial system will transition from the dominance of the US dollar to the coexistence of several major currencies, including the US dollar, RMB, euro, and the BRICS currency.

Third, in a situation where several major currencies coexist, the greatest common denominator for joint action among the Global South countries is establishing a reference value for settlements in their local currencies and an exchange platform to support such settlements. The great demand for such a valuation reference provides an opportunity for the creation of a BRICS currency. Most Global South countries do not wish to choose sides in global political-economic matters but seek a multipolar world and the creation of international platforms that are more equal and fair, and that better represent their interests so that they can hedge against the risks posed by the current international economic order. In advocating for de-dollarisation, these countries aim to mitigate the various risks posed by the US dollar, not to confront it. Therefore, the traditional perspective – i.e., the international financial system must have one dominant currency and, since the dollar is no longer viable, it should be replaced by the RMB – may be inadequate in grasping the crux of the global situation, as the world faces ‘great changes unseen in a century’ (百年未有之大变局, bǎinián wèi yǒu zhī dà biànjú).

The Russia-Ukraine war is profoundly changing the international order: on the one hand, Western countries are trying to break away from the unified international economic order led by the United States in the post-Cold War period and return to the landscape of the coexistence of the two confrontational systems during the Cold War period; on the other hand, the Global South countries, through de-risking, have begun to put building a multipolar world into action, which was just lip-service in the past. Whether it is the de-risking of China and Russia by the West or the de-risking of the West by the Global South countries, the common feature is the weakening of the existing Western-dominated international economic order and the promotion of a more multipolar world.

The Impact of Western Sanctions against Russia

This section analyses the relationship between de-risking, de-dollarisation, and the BRICS currency and the impact that Western economic sanctions against Russia have had on this dynamic in the Global South.

(i) International Energy Markets

After the outbreak of the Russia-Ukraine war, both Europe and the United States banned imports of crude oil, refined petroleum products, and coal from Russia, leading to a sharp decline in Russian energy exports to Europe. Russian gas exports plummeted 25.1 percent in 2022 due to European countries’ halting their purchases of Russian gas and the sabotage of the Nord Stream pipeline. Europe’s energy decoupling has forced Russia to accelerate its efforts in Asia-Pacific markets. In 2022, China’s imports of Russian pipeline gas and liquefied natural gas (LNG) soared 2.6 times and 2.4 times to $3.98 billion and $6.75 billion, respectively.^[1]

Similar trends have taken place in the oil sector. Prior to the war, in 2021, 8 percent of US oil imports came from Russia; after the outbreak of war, the US banned imports of Russian energy.^[2] In December 2022, the European Union (EU), Group of Seven (G7) countries, and Australia imposed an embargo on Russian oil and a price cap on Russian exports. This forced Russia to reduce the price of its oil significantly and shift its export focus to the Asia-Pacific region. India, China, and Turkey, all major energy consumers, have significantly increased their imports of Russian crude oil.^[3] In 2022, China’s imports of Russian crude oil increased by 8 percent, making Russia the second largest supplier of crude oil to China.^[4] India’s imports of Russian oil saw the largest increase, increasing by more than 9 percent in the months following the imposition of the Western embargo in December 2022. In addition, in 2022, China’s coal imports from Russia surged 20 percent to 68.06 million tonnes, while India’s imports of thermal coal from Russia grew by nearly 15 percent to 161.18 million tonnes.^[5]

(ii) Supply Chain Restructuring

Many US-origin technologies have been restricted from being exported to Russia and Belarus. US exporters must apply for licences to export a range of technologies to Russia, including computers, communications equipment, sensors, lasers, navigation, and aerospace and propulsion technology. The sanctions against Russia also restrict the export of products from other countries that use such US technologies.^[6] Since February 2022, European exports to Russia affected by the sanctions have amounted to 43.9 billion euros, including products related to quantum computers, advanced semiconductors, electronic components and software, machinery and transport equipment, energy industry equipment, technology, and services, aviation and space industry goods and technologies, maritime navigation and radio communication technology, dual-use goods, luxury goods, and more.^[7]

The massive withdrawal of US, European, Japanese, and South Korean companies from Russia has created opportunities for companies from other countries to enter the Russian market. For example, Samsung and Apple’s joint share of the Russian mobile phone market, which was as high as 53 percent at the end of 2021, fell to only 3 percent by the end of 2022. Meanwhile, the share of Chinese mobile phones in the Russian market rose from 40 percent at the end of 2021 to 95 percent at the end of 2022.^[8] A similar trend was observed in the Russian auto market. Between 2021 and 2022, Germany’s BMW and Mercedes-Benz disappeared from the Russian market, while China’s Chery, Great Wall Motor, and Geely rose to the top ten best-selling passenger car brands. Despite the sharp overall contraction of the Russian auto market due to economic sanctions, sales of Chinese-made cars in Russia grew by 7 percent in 2022.^[9]

(iii) Financial Risk Avoidance

After the outbreak of the war, the West expelled Russia from the SWIFT international banking communications system, and European and American banks froze as much as 300 billion euros of the Russian central bank’s foreign exchange reserves and 21.5 billion euros of assets belonging to sanctioned Russian individuals.^[10] In the past, the US dollar was trusted globally as a ‘safe haven currency’, but this trust has been broken by the Western financial sanctions against Russia, which have de facto constituted a ‘selective default’.^[11] Many developing countries, including traditional US allies such as Saudi Arabia, have begun to fear that, should they ever find themselves on the opposite side of the US in a geopolitical dispute, their dollar-denominated assets will not be safe. Countries like India have also argued that sanctions against Russia have led to volatility in food and energy prices, harming the world’s poor. As the US-China relationship has become increasingly tense, concerns have also grown regarding the potential crises that US sanctions against China could trigger in the future. Although the US dollar is the world’s most popular trade settlement currency, China is the world’s largest trading nation, and in the face of this international political and economic uncertainty, some countries have argued that it would be better to reduce the use of the US dollar in global trade rather than reduce trade with China.^[12]

The case of Switzerland illustrates how the behaviour undertaken by other countries to avoid the financial risks posed by sanctions against Russia can harm the West’s financial sector. Before the war, roughly 80 percent of Russian commodities were traded through Switzerland, amounting to $11 billion, while 30 percent of private Russian assets held abroad were located in Switzerland. Since the war broke out, Switzerland has abandoned its neutrality and participated in the EU’s financial sanctions against Russia. Credit Suisse alone froze $19 billion worth of Russian assets, more than a third of all Russian assets in Switzerland, while the Swiss government froze more than $8 billion worth of Russian and Belarusian assets. Swiss authorities also required local banks to report deposits of over 100,000 Swiss francs belonging to Russian individuals and prohibited them from accepting new deposits exceeding this amount from Russian individuals. By November 2022, 7,500 people were on the list, involving CHF 46.1 billion in deposits.^[13] Due to these sanctions, wealthy individuals worldwide began to move their funds out of Switzerland. For instance, Credit Suisse experienced severe client divestment, reaching $119 billion in the final quarter of 2022 alone. The divestment crisis was compounded by the subsequent collapse of several US banks and the refusal of Credit Suisse’s largest shareholder, Saudi National Bank, to increase its capital input. As a result, Credit Suisse faced insolvency and was ultimately acquired by UBS at the behest of the Swiss government. Leading Swiss banker Josef Ackermann noted that the Swiss government had put the rule of law and property rights at risk when it made individuals pay for the actions of the Russian government. Citizens of other countries would assume that the Swiss government would do the same in the future to make them pay for the wrongs done by their homeland governments. Confiscating the assets of Russian individuals has been devastating for the Swiss financial industry.^[14]

Financial Sanctions and Barter Trade

The impact that Western economic sanctions against Russia have had on the Global South is intertwined across three areas: energy markets, supply chains, and international finance. Accordingly, the Global South’s de-risking behaviour is closely related to these three areas.

After the West banned Russia from the SWIFT system in March 2022, Russian energy exports could no longer be settled in dollars or euros. Russia countered by requiring hostile countries to purchase Russian energy in rubles. If these countries did not have rubles, they had to open accounts in Russian banks to deposit dollars and euros, which were then converted to rubles for payment. Since European countries were unable to completely decouple from Russian gas immediately for most of 2022, they had to convert their euros and dollars into ruble payments. In this way, the ruble’s exchange rate was strongly supported for a time. At one point, its value was even higher than it had been before the war.

The weaponisation of the US dollar and Russia’s countermeasures have given the Global South countries a new perspective on the relationship between the international financial and trading systems. First, the dollar’s value as a currency for international trade settlements has become less important for countries facing Western economic sanctions and experiencing major geopolitical crises or wars because these countries cannot buy what they want even if they have dollars. Second, in such extreme environments, a country can only trade with others for critical resources if it has energy, resources, or industrial manufacturing capacity.^[15] Third, to reduce the risk of being unable to make purchases in the face of sanctions or warfare, it is necessary to build strong cooperative relationships in peacetime with various economies that can provide important goods. Finally, trade between major producers of energy, resources, and manufactured goods, if settled in their currencies, can enable them to significantly reduce their dependence on the US dollar.

With Russia’s energy exports shifting to the Asia-Pacific and competition intensifying among energy exporters for this regional market, major exporters of energy and resources are expanding their cooperation with China for several reasons. First, these principal energy and resource exporters also import vast quantities of manufactured goods from and have trade surpluses with China. To bundle strategic interests, these countries are more willing to settle trade in RMB. For example, China has signed or intends to sign, agreements to settle bilateral trade in RMB with major energy resource countries – such as Saudi Arabia, Russia, Brazil, Iraq, Iran, and Argentina – all of which have tens of billions of dollars in trade surpluses with China and can use RMB to purchase more manufactured goods and infrastructure directly from China. Second, under extreme conditions, such bilateral trade can be bartered. As such, for these energy-rich countries, cooperation with China, a manufacturing powerhouse, can reduce the risk of being unable to obtain vital supplies should they encounter a major international crisis. Third, through cooperation with China, these countries can combine bilateral trade in energy resources with their medium- and long-term economic development needs, obtaining from China the investment, technology, and infrastructure necessary for industrial development, particularly high-tech industries.

In December 2022, the Gulf Cooperation Council (GCC) and China held their first joint summit in Saudi Arabia. The joint statement issued at the conclusion of the summit marked the beginning of a paradigm shift in strategic cooperation between the Gulf states and major countries outside the region. Since the Second World War, strategic cooperation between the Gulf states and the United States has taken the form of an ‘oil-for-security’ exchange: the Gulf states ensure the supply of oil to the US, which, in turn, provides security for the states, including the sale of massive amounts of weapons; the Gulf states use their oil revenues to purchase a large number of US treasury bonds and invest in US dollar-denominated assets, thus creating a petrodollar system.^[16] As the US began to increasingly exploit its offshore oil and gas reserves as well as shale oil, it not only drastically reduced its dependence on energy from the Middle East – thereby reducing the strategic value of the Gulf region to the US – but also became a competitor to the Gulf states in the international energy market.^[17] Before the Russia-Ukraine War, the US and Gulf states had already begun to drift apart. After the outbreak of the war, the decoupling of Europe from Russian energy and Russia’s shift to the Asia-Pacific energy market have greatly accelerated this trend. Unlike the oil-for-security cooperation between the Gulf states and the United States, cooperation between the Gulf states and China is based on ‘all-round cooperation in the energy sector’: China invests in the Gulf states’ downstream energy industries, while the Gulf states use their expertise to cooperate with China in the development of its upstream energy industries, including joint oil and gas exploration and extraction in the South China Sea. A new ‘oil-for-development’ paradigm is replacing the old ‘oil-for-weapons’ paradigm.^[18] This new paradigm is reflected in the recent consensus in cooperation between China and countries such as Saudi Arabia, Russia, and Brazil.^[19]

The US-dominated international economic order is based on finance, emphasising the dominance of the US dollar as the world’s reserve currency. The new international economic order that is being promoted by the Global South, including China, is based on trade – exchanging energy and resources for manufactured goods and infrastructure. This new international economic order will be based less on currencies and more on commodities, which will lead to higher inflation rates in the West. During the Nixon administration, then US Treasury Secretary John Connally famously remarked, ‘The dollar is our currency, but it’s your problem’. According to former Credit Suisse analyst Zoltan Poszar, this is now being replaced by a new motto: ‘Our commodity, your problem’.^[20]

RMB or Common Currency?

Where is the Global South’s de-dollarisation trend heading? In the current debate, many believe that China’s RMB will replace the US dollar, while others have high hopes for the development of a common currency backed by oil. Both routes have their challenges.

Let us first look at RMB internationalisation. From a geopolitical perspective, this is widely seen as a major threat to the US dollar. There is no doubt that the US opposes the internationalisation of the RMB and pressures other countries on this issue. A recent example is Saudi Arabia, which has indicated that it will consider using other currencies to settle its energy trade but has yet to issue an official statement on the matter. Meanwhile, in March and April 2023, the Indian government explicitly opposed the country’s companies settling energy imports from Russia in RMB. In July, under pressure from Russia, India had to pay a small portion of energy imports in RMB. However, this is because, under Western economic sanctions, Russia exported oil to India at a very low price; hence, India’s huge benefits greatly outweighed its geopolitical concerns about the RMB’s expanding influence. Energy resource exporters are relatively more receptive to settling in RMB because they all have large trade surpluses with China. For countries with large trade deficits with China, settling in RMB would not address their settlement cost concerns with the US dollar, and it actually would be more costly.

Moreover, replacing the dollar with the RMB would not resolve the paradox that is responsible for the dysfunctionality of the international monetary system. As the Brazilian economist Paulo Nogueira Batista Jr. pointed out, ‘[t]he fundamental contradiction […] lies in the fact that the international system depends on a single national currency, managed according to the interests of the state that created it’. The United States tends to formulate financial policies to serve its interests, which are not always in line with those of the international financial system and, in many cases, the two conflict with each other. Thus, even if the Global South countries continue to work to de-dollarise, they would not support another country’s currency assuming the US dollar’s role as the new key currency.^[21]

So far, RMB internationalisation has not taken the US dollar as a reference point but has followed its own path. First, the RMB has not achieved free currency convertibility, without which it cannot provide other countries with the same efficiency and ease of use in international trade settlements as the dollar. Second, for a national currency to become a major world reserve currency, the home country must have a developed financial market, sufficient financial instruments available for investment, and capital account liberalisation. However, China’s financial sector remains relatively underdeveloped and the country has always regarded national financial security as a top priority. Third, as the key global currency, the dollar provides liquidity to other countries. However, as a manufacturing giant with a large population and a high pressure to maintain employment, China cannot provide liquidity to other countries through a large current account deficit as the United States does. Under these internal and external constraints, the impact of different RMB internationalisation paths on the Chinese economy remains to be explored.

There is a risk in using local currency settlements for bilateral trade in the Global South: if the deficit country’s currency underperforms, the surplus country is likely to give up its long-term holdings; if the surplus country chooses to sell, the deficit country’s currency is at risk of further depreciation.^[22] While there are certainly real economic fundamentals and the impact of US interest rate hikes behind the recent RMB depreciation, another important reason is the effect of currency swaps and RMB settlements, given that the RMB is not freely convertible. For example, Russia suddenly possesses a large amount of RMB through its energy trade surplus with China, but there is no channel for these RMB to flow back to China because China does not have a developed financial market or sufficient financial instruments for Russian investment. Under these conditions, it becomes a reasonable choice for Russia to maintain the ruble’s exchange rate either by selling large sums of RMB or by selling RMB acquired at parity for dollar profits against the backdrop of the dollar’s appreciation against the RMB. As long as China’s financial markets and instruments are not developed to provide sufficient channels for the return of the ‘oil RMB’ to China, countries with large surpluses will have an incentive to sell RMB for other currencies, thus creating pressure to devalue the RMB. Whether China is willing to bear this burden of RMB internationalisation in the long term remains to be seen.

Now, let us turn to the prospects for a common BRICS currency. The strength of the BRICS has indeed grown rapidly, laying a solid foundation for launching a BRICS currency. For reference, when the G7 was founded in the 1970s, the group’s share of global gross domestic product (GDP) was as high as 62 percent; today, the BRICS countries have surpassed the G7 in terms of their respective shares of global GDP, measured at purchasing power parity (PPP). According to the International Monetary Fund (IMF), in 2021, the BRICS collectively accounted for 31.5 percent of global GDP (PPP), whereas G7 accounted for 30.7 percent.^[23] The IMF projects that by 2028, the expanded BRICS10 (including Egypt, Ethiopia, Iran, Saudi Arabia, and the UAE) will account for 37.9 percent of global GDP (PPP), with the G7’s share falling to 27.8 percent.^[24] With major energy exporters such as Saudi Arabia, Iran, and the UAE having joined the BRICS cooperation mechanism in 2024, the likelihood of a BRICS currency has further increased. In the future, if the BRICS can cooperate with OPEC in developing a BRICS currency, such an initiative may surpass the limitations of the BRICS member countries and greatly enhance the material basis of a BRICS currency.

However, there are still significant challenges to issuing a BRICS currency underpinned by oil. First, the underpinning of the US dollar by oil is guaranteed through the exclusivity of the US-Saudi agreement to price oil only in US dollars. Countries use the US dollar as a foreign exchange reserve to ensure that their energy imports are not subject to exchange rate fluctuations, thus indirectly securing the US dollar’s status as a key global currency. Would a BRICS currency be able to establish exclusivity in oil and gas pricing and settlements in the international energy market, thus supporting its transformation into a reserve currency for countries? Unless the BRICS countries want to go to war with the United States, it seems unlikely. Would it be possible for a BRICS currency to become one of several currencies for oil and gas pricing and settlements? The answer is yes, but a BRICS currency would still face fierce competition from the US dollar, which has the world’s largest financial markets and most developed financial instruments, especially the massive US Treasury market. Second, developing an oil-based BRICS currency is easier said than done. To underpin a currency with oil, a fixed exchange rate must be established between a certain unit of oil and a certain unit of the currency. Yet, even if a fixed exchange rate is established between a BRICS currency and oil, when the price of oil rises in the international market, who will BRICS currency holders turn to for oil at the fixed exchange rate?^[25] When designing the Bretton Woods system, John Maynard Keynes had also envisioned the establishment of an exchange rate between oil and the dollar, but he found that the types and quality of oil were too numerous and varied too significantly from country to country, so this was not operational in practice. In the end, he decided to use gold.^[26]

Local Currency Settlement, Reference Values, and Exchange Platform

For Global South countries, the greatest common denominator for future joint action is the demand for local currency settlement, which is shared across the various de-dollarisation propositions put forward today. In recent years, several agreements have been reached between BRICS countries to use local currencies for bilateral trade, including China and Russia, China and Brazil, and Russia and India’s energy trade. Furthermore, in 2023, the Association of Southeast Asian Nations (ASEAN) met to discuss reducing their reliance on the US dollar, Euro, British pound, and Japanese yen for financial transactions and issued a declaration on the promotion of local currency trading schemes. ASEAN plans to expand its cross-border digital payment system further and allow ASEAN countries to trade in local currencies. This will encourage cross-border trade and investment within the ASEAN grouping and reduce the impact of external factors on the regional economy. Southeast Asia is often subject to economic volatility due to abrupt policy changes at central banks in the United States and other countries and regions; as such, ASEAN countries would like to increase the use of local currencies to promote economic stability and reduce the spillover effects of high inflation in developed countries.^[27]

For various reasons, it is difficult to establish a direct and relatively stable exchange rate between two currencies with limited international circulation. Therefore, when making local currency settlements, it is often necessary to resort to a reference to help the parties establish their relative values vis-à-vis each other. This creates an opportunity for the development of a BRICS currency. If a relatively stable exchange rate is established between a BRICS currency and the sovereign currencies of the respective BRICS member countries, it can serve as a reference value between the currencies of the different member countries.

Russia and Brazil, both proponents of de-dollarisation, have put forward different views on whether and how to anchor a BRICS currency. On the one hand, Russia has favoured anchoring a BRICS currency in gold, establishing an exchange rate between a unit of BRICS currency and a unit of gold. The challenge with this option is that central banks would have to stockpile large amounts of gold.^[28] US financial expert James Rickards, inspired by the Russian view, has instead suggested that a BRICS currency use gold only as a reference value and not to underpin the currency, thereby allowing BRICS central banks to avoid the need for gold redemption for BRICS currency holders. Such a BRICS currency would not replace the US dollar but coexist with it and reflect its value to a large extent with the help of the US dollar. Since gold is denominated in dollars on the international market, the fixed relationship between a BRICS currency and gold will also be reflected in the dollar-denominated price of gold.^[29] According to Rickards, the dollar will depreciate in the long-term; however, even if the dollar does depreciate in the future, this would not negatively impact a BRICS currency because a depreciation of the dollar would lead to an appreciation of gold and, at the same time, an appreciation of a BRICS currency. Under this framework, the US dollar would bear the burden of being the key global currency, while the BRICS currency would merely need to coexist and reap the benefits. As the BRICS grows to thirty or forty members, there would be no major obstacles to the internal circulation of such a BRICS currency; the diversity of trade among the BRICS members would be sufficient to support the currency’s settlement efficiency and ease of use.^[30]

On the other hand, Nogueira Batista, former vice president of the New Development Bank (NDB), has put forward an influential view that opposes anchoring a BRICS currency in gold or any other commodity. Instead, it would be preferable to build a BRICS currency as a basket of currencies similar to the IMF’s Special Drawing Rights (SDR), in which the relative weight of each BRICS member’s currency would be determined according to its economic strength. Such a BRICS currency would not need to replace national currencies – countries would retain their monetary sovereignty – and would not require the BRICS to establish a unified central bank – the New Development Bank (NDB) could undertake the issuance of the currency.^[31] How could this BRICS currency be widely accepted without an anchor asset that is freely convertible at a fixed exchange rate? Following Nogueira Batista’s logic, the credit of the BRICS currency would be backed by the currencies of the respective BRICS member countries. BRICS currency holders would have the right to freely convert it into their currencies at any time. The NDB would ensure the convertibility of the BRICS currency, relying on its reserves and, when necessary, seeking additional funds from countries that issue internationally liquid currencies to support the BRICS currency. Another confidence-boosting option would be for the NDB to issue BRICS bonds of varying maturities and interest rates, while allowing the BRICS currency to be freely convertible into BRICS bonds.^[32]

Initially, a BRICS currency is likely to serve only as a unit of account, providing a reference value for the BRICS member countries when settling bilateral trade in their local currencies, thus reducing the current cost of settling in US dollars. A BRICS currency would be freely convertible with the currencies of BRICS member countries but would lack the systemic characteristics of a key currency like the US dollar. Nonetheless, it could still help the BRICS countries hedge some of the risks the US dollar poses. The Euro was born partly out of Europe’s desire to avoid the negative externalities of US financial policy. While the Euro has been far from successful in competing with the dollar as a key international currency, it has been successful in helping to insulate the eurozone from the dollar cycle.^[33] It may be easier to establish political consensus among the BRICS countries around a currency that coexists alongside the US dollar. At the 2023 BRICS summit, both Russian President Vladimir Putin and Brazilian President Luiz Inácio Lula da Silva actively pushed for de-dollarisation; however, the host government, South Africa, did not include de-dollarisation as an official topic under pressure from the US, while India explicitly opposed the option of a head-to-head confrontation with the US. With Russia hosting the 2024 BRICS summit, it can be expected that the Russian government will push hard for de-dollarisation. Yet, as long as the BRICS decision-making process adheres to the principle of consensus, the position of countries such as India is bound to abort any radical programmes. Given the BRICS international political structure, a BRICS currency is more likely to move forward if it has a relatively straightforward initial functionality – emphasising only the basic function of serving as a unit of account to facilitate local currency settlements in trade among BRICS countries – rather than an initiative that more deliberately confronts the US dollar.

Observers tend to believe that an initial BRICS currency will not be used for personal consumption but only for international trade settlements between banks. It is likely that a BRICS currency will be launched as a digital currency and will be linked to the digital currencies actively promoted by various countries’ central banks.^[34] Therefore, creating an international platform to support the exchange of digital currencies will not only be important for a BRICS currency, but will also be necessary infrastructure for the future international financial system. In 2021, the Hong Kong Monetary Authority, the Digital Currency Institute of the People’s Bank of China, the Bank of Thailand, and the Central Bank of the United Arab Emirates jointly launched a multi-central bank digital currency bridge (mBridge), a cross-border payment system that can be used as an alternative to SWIFT. During its trial period from August to September 2022, the four central banks issued $12 million worth of digital currencies on mBridge, while twenty commercial banks used the digital currencies on the platform on behalf of their clients to conduct more than 160 payments and foreign exchange (FX) and payment versus payment (PvP) transactions, with a total value of $22 million.^[35]

This digital currency exchange platform, underpinned by blockchain technology, is of great significance to Global South countries. High-value, high-volume wholesale international payments between financial institutions are currently a major component of cross-border transactions. This wholesale interbank FX market provides incentives and liquidity for a wide range of retail operations. However, this form of FX trading is subject to settlement risk. As it still takes one to two days to complete a cross-border payment, when one party has completed the payment, the other party will not have immediately received it. This risk affects up to $6.6 trillion worth of transactions per day in the international FX market, and more than half of the daily cross-border transactions lack insurance mechanisms. In addition, the system does not work around-the-clock, which also inconveniences both sides of the transaction. PvP is an important solution as it eliminates settlement risk and reduces friction by ensuring that both parties confirm and receive payments simultaneously. Moreover, mBridge functions around-the-clock, year-round, and both transaction parties decide when to complete the settlement. Central banks in all countries have a huge demand for this service. While some developed markets already offer PvP services, they do so in a limited number of currencies, completely ignoring the ever-growing currency demands from the Global South. Replacing the services provided by traditional banks will require shifting essential infrastructure facilities into a completely new processing model, utilising distributed ledger technology and digital currencies. Banks in many developed countries are not yet ready to meet these challenges.^[36]

Discussion

The pendulum movement of globalisation, the hegemonic cycle, and technological revolution have brought the world into an era of ‘changes unseen in a century’. How should we interpret the Global South’s de-risking and de-dollarisation in this period? How should we understand the expansion of the BRICS and its impact on the future international order? And how can we identify the trajectory and future direction of China’s exploration in the twenty-first century?

First, as de-dollarisation continues, a conflict may arise in the future between a multi-currency financial system and the post-war multilateral trading system, further intensifying de-globalisation. The US dollar has various disadvantages as the global reserve currency, but its settlement efficiency and ease of use have made it an indispensable component of the post-war multilateral trading system. In the future international financial system, while countries may shun the dollar or even adopt barter trade as a transaction form, they will not use an inconvenient currency as their primary reserve currency. In the era of globalisation, cost and quality determined the flow of goods and services. Today, the declining influence of the US dollar signals the demise of this efficient business model, and the flow of goods and services begins to depend on the willingness of exporting countries to accept a particular country’s currency. When countries no longer accumulate surpluses in their current accounts as a means of acquiring a reserve currency, they may resort to restricting trade and employing other distortionary methods to maintain balance in bilateral trade.^[37]

Second, the West’s weaponisation of the US dollar after the outbreak of the Russia-Ukraine War and the de-dollarisation efforts of Global South countries indicate that both developed and developing countries are frustrated with the post-Cold War international order established by US hegemony. The West’s attempts to decouple or de-risk from China and Russia are shaking the dollar’s hegemonic status. Meanwhile, the attempts to return to a Cold War situation are likely to be counterproductive in the end, seriously weakening the West’s own position in the international order. This is because the decoupling of the West and the de-risking of the Global South are giving rise to a ‘systemic rival’ that surpasses the Western alliance in terms of population, the size of the real economy, energy, resources, and industrial manufacturing capacity. The balance of power between the West and the Global South countries today is very different from the balance that existed during the Cold War between the West and the former Soviet bloc.

Third, technological development will be a critical enabler of local currency settlements for Global South countries in the future. Both mBridge and a future BRICS currency will support transactions through digital currencies and use blockchain as the underlying technology. To move away from the high cost of traditional banking services in developed countries, Global South countries have been building a new generation of financial infrastructure facilities based on contemporary information technologies.

Finally, China’s long exploration of a relationship between its own development and the international environment seems to have found a clear outline. From its full integration into Western-dominated globalisation at the end of the twentieth century and the beginning of the twenty-first century, to its Belt and Road Initiative (BRI) aimed at promoting Eurasian economic integration over the past decade, to the establishment of the Shanghai Cooperation Organisation (SCO) and the BRICS mechanism, China has ultimately prioritised cooperation with Global South countries.

The geographical distribution of the six countries invited to become members indicates the priorities of the BRICS and China in their future development strategies. First, five of the six invitees are located around major transport routes such as the Strait of Hormuz, the Red Sea, and the Suez Canal, suggesting that the BRICS countries, including China, are placing more emphasis than ever on the Middle East as a hub connecting Asia and Africa. In China’s previous spatial projections of the BRI, Europe was the western terminus and Southeast Asia was the important southeastern end. However, under the conditions of the United States’ ongoing Indo-Pacific strategy and Europe’s tightening policy, China not only mediated the historic rapprochement between Saudi Arabia and Iran in March 2023 but also brought the two countries into the BRICS. Such an emphasis on the Middle East signals that the BRI’s future development will probably tilt even more towards the region. The ultimate aim is to establish a land bridge between Asia and Africa, transforming these two continents into the main arena for collective actions by the BRICS countries in the Global South.

Second, the invitation of energy giants such as Saudi Arabia, Iran, the UAE, and Argentina represents a shift in the Global South, beyond individual initiatives and moving towards institutionalised efforts on a global scale to de-risk from the weaponisation of the US dollar. This development lays a significant foundation for the creation of a BRICS currency. The expanded BRICS includes six of the world’s top ten oil producers in 2022 (which together accounted for 40 percent of the world’s oil production) and five of the world’s top seven oil consumers in 2021 (which together accounted for 30 percent of the world’s oil consumption.^[38] With such a concentration of production capacity and consumption, the creation of a BRICS currency – first and foremost for energy trade among member countries – seems to be on the horizon.

Nevertheless, China took a low-key stance on de-dollarisation at the 2023 BRICS summit. Unlike Putin and Lula, who explicitly advocated de-dollarisation, President Xi Jinping, when speaking on the topic, only said, ‘We need to fully leverage the role of the New Development Bank, push forward reform of the international financial and monetary systems, and increase the representation and voice of developing countries’.^[39] This relatively moderate stance is much closer to that of most Global South countries. Even today, China still owns $830 billion in US Treasury bonds and $2 trillion in other dollar-denominated assets. In this sense, China remains embedded in an international financial system in which the US dollar is the key currency. Also, amid the intensifying competition between China and the United States, holding US Treasury bonds remains one of the few vital leverage points that China has to respond to US pressure. Constrained by these circumstances, China is unlikely to aggressively pursue de-dollarisation. Losing its leverage could not only make it more difficult for China to counterbalance US strategic pressures but could also lead to mutual harm in the event of a strategic miscalculation by the United States.

Since the US ‘pivot to Asia’, China’s response and international strategy – which included the creation of the BRI – has consistently kept open two possibilities: hedging or confronting. A century ago, the resonance of the three major historical cycles of globalisation, hegemony, and technological revolution pushed the world into an abyss. Today, a situation has again emerged in which these three cycles are simultaneously exerting influence: the pendulum of globalisation is shifting from market fundamentalism to protectionism, the hegemonic cycle is entering a phase where emerging powers are approaching and challenging the hegemonic power, and the technological revolution is rapidly altering the international political and economic power dynamics. A century ago, facing the crises created by these three primary cycles, nations chose confrontation, resulting in the ultimate tragedy of two World Wars and immense human suffering. Today, war is raging in Ukraine and elsewhere, while the weaponisation of the US dollar and the de-risking efforts of the Global South are accelerating the collapse of the post-Cold War unipolar world.

As the wheels of history once again bring the world to a pivotal crossroads, the Global South’s convergence towards the BRICS cooperation mechanism provides China with a new opportunity to hedge against growing dangers. Positioned within an international organisation featuring the most powerful developing countries, wielding a BRICS currency that coexists with the US dollar, and commanding significant global capabilities in energy, resources, and industrial manufacturing, China will enhance its ability to drive changes in the international political and economic order. So too will the representation and influence of the Global South increase in international affairs.

Bibliography

Author’s Notes

‘The New Forms of Twenty-First Century Socialism’ (新时代，新自觉——如何在当下重新思考社会主义) was originally published in Wenhua Zongheng (文化纵横), issue no. 3 (June 2023).

After three decades of expansion following the end of the Cold War, liberal capitalism is now facing a crisis. The world is enveloped in a fog of uncertainty amid significant challenges posed by economic recession, geopolitical conflicts, social rifts, and disruptive new technologies. At this historical juncture, it is necessary to revitalise socialism and further develop socialist theories suited to the new conditions of the twenty-first century, paving the way for a new future for humanity.

The world has come a long way since the mid-nineteenth century, when Marx and Engels completed the fundamental transformation of socialism from utopia to science, most famously synthesised in The Communist Manifesto. Over the past 175 years, generation after generation of socialists have followed in the footsteps of Marx and Engels, working tirelessly to elevate socialism from a mere ideological concept to class struggles, political organisations, social revolutions, governments, and civilisation forms. The historical development of socialism can be divided into three main forms.

Classical Socialism in the Centres of European Capitalism

The socialist movement originated in Europe and its transformation from utopia to science also took place there, which was not accidental. This region benefited from the development of capitalism, becoming the most developed area in the world. The major European countries, with the first-mover advantage of the Industrial Revolution, created a new and powerful productive force.

Internally, a new ruling class rose to prominence, the bourgeoisie. Through various forms of bourgeois revolution, this class seized power successively in a series of European countries, creating corresponding social, political, market, and cultural structures, including the modern nation-state. The advancements and transformations of early capitalist modernisation ultimately turned the page on Europe’s somewhat gloomy medieval era.

Externally, these European countries that led in modernisation, through continuous colonial expansion and comprehensive means such as military wars, religious propagation, and cultural aggression, opened the prelude to the subsequent centuries-long globalisation centred on Europe. It is worth noting that, during this period, the internal and external development of European capitalism was intertwined and mutually conditioned: the internal development of politics, economy, culture, and society propelled and led the external expansion; in turn, external expansion greatly supported and strengthened internal development.

Behind the dazzling achievements of European capitalism, however, a new socialist ideology was quietly gestating and breaking ground. The economic and political development of European capitalism created the social conditions for the emergence of Marxism; the growth of the working class and the rise of the labour movement to advocate for their own interests, provided the class foundation; and the flourishing of social sciences, philosophy, and economics provided the intellectual environment. Together these various elements culminated in the publication of The Communist Manifesto and the birth of scientific socialism.

The founders of scientific socialism – Marx, Engels, and their contemporaries – generously acknowledged and congratulated the achievements of capitalist development. However, what set them apart from the majority of their peers was their ruthless criticism of European capitalism and firm belief that the seemingly thriving capitalist system would usher in its own swan song. These socialist pioneers fearlessly pointed out that – despite capitalism’s development of the productive forces and material wealth, and the associated advancements in politics, society, and culture – the system had profound inherent contradictions and shortcomings that capitalism could only alleviate but not eradicate. As such, capitalism could never be considered the ultimate form of human social development. It emerged in history and will be negated by history.

The socialists of this period believed that the power to make change and transcend capitalism was held by the working class and other social forces that faced oppression. In their view, it was in the interests of the working class to pursue a revolution and shatter the old world and the declining capitalist system, rather than submit to continued exploitation and oppression at the hands of the bourgeoisie. Through political struggles and social revolutions, the oppressed classes would overthrow the bourgeoisie, become the ruling class, and build a more rational and humane system in place of capitalism. The ideal system was socialism, which would eventually move towards a more advanced form of development, communism. Although the precise details of this future ideal society could not be depicted, these thinkers contended that the working class and its political parties would inevitably progress toward it.

Most importantly, in the process of criticising capitalism and arguing for socialism, this generation of socialists distilled the general laws of human social development and formulated a worldview and methodology with historical materialism at its core. This has enabled successive generations to develop more accurate understandings of the world and the movement of human history.

The classical form of socialist thought that developed in Europe during this period consisted of three key elements:

1. Socialism can only emerge in those societies where capitalism is most developed. The productive forces, political forms, and ideological resources needed to build socialism are generated within advanced forms of capitalism.

2. Capitalism can and will inevitably be negated and transcended. No matter how long capitalism sustains itself, it will ultimately amount to a fragment of human history. Even if capitalism can make internal improvements as circumstances evolve, it will not be an eternal system due to its inherent contradictions. After fulfilling its historical mission, capitalism cannot avoid being relegated to history.

3. The end of capitalism is the starting point of socialism. Socialism will be built upon the productive forces, material wealth, intellectual development, and modernisation that humanity has already created. It is precisely on the basis of these resources accumulated under capitalism that socialism seeks to resolve the tensions and conflicts between the productive forces and relations of production, overcome the constraints of private ownership of the means of production, and address all of the contradictions that arise from this order. While socialism is indeed a critique and negation of capitalism, beyond this it aims to achieve a new transcendence and sublimation. The more capitalism develops, the more it prepares the material and other conditions for socialism. Similarly, as the productive forces of capitalism become more advanced, the relations of production become more complex, and state governance grows more sophisticated, in turn, it becomes increasingly challenging to attain higher productivity, develop greater productive forces, ensure genuine fairness, and build a harmonious society. In other words, the need to construct a new socialist society grows alongside capitalism. Humanity is capable of building this better society.

The socialist classics offer a sweeping narrative of immense vitality, illuminating the path for humanity to traverse through the jungle of capitalism and inspiring people to engage in the long historical struggle towards socialism.

Transformative Forms of Socialism in the Colonies and Semi-Colonies

During the twentieth century, socialism developed in a manner that differed significantly from the expectations of classical socialism. Rather than progress in a linear manner, socialist development took place in alternating peaks and valleys, including the reversal of successful revolutions and socialist developments in the Soviet Union and Eastern Europe.

Socialism failed to emerge in the areas it had been expected to, namely the developed capitalist countries of Europe. However, new areas of growth emerged beyond the vision of classical Marxist writers. Socialism emerged, not within global capitalism, but outside of it; not in the countries with the most advanced productive forces, but in the economically underdeveloped regions; not in the West, but in non-Western countries; not out of traditional, urban class struggles, but from national liberation movements in the colonies and semi-colonies under the grip of imperialism. The essential meaning and logic of socialism were redefined. The extraordinary breakthroughs of socialism in Russia, China, and elsewhere transcended classical Marxism and constituted a distinct form of transformative socialism.

From the perspective of socialist thought, one essential feature of capitalism is its conquest of the world. The invasion and plunder of vast non-Western regions is necessary to sustain the prosperity and comfort of the capitalist centres of Europe. The development of wealthy countries is built upon the underdevelopment of poor countries. In this way, capitalism not only creates internal inequality but also external inequality. Classical Marxist writers recognised the destructive impact of capitalist colonial expansion on the vast non-Western world, but due to various objective historical conditions, they did not develop a systematic and detailed understanding of this matter. It was not until Lenin and subsequent Marxist theorists that the national liberation struggles of colonies and semi-colonies against capitalist and imperialist aggression received more acute attention. Reflecting this greater emphasis, the classic proposition, ‘workers of the world, unite!’ was expanded to ‘workers of the world and oppressed peoples, unite!’. Although the focus of socialist theory and practice at that time still centred on the core capitalist countries, the influence of the European socialist movement in the vast colonies and semi-colonies continued to grow. Socialist criticisms of capitalism, the ideal and pursuit of a better future society, and the courage and determination of the working class and its parties to overthrow the old world, were important sources of inspiration in the colonised world. Socialism demonstrated that it was possible for the oppressed to make new choices and build new societies, and so it became an extremely important intellectual resource for these countries in their resistance against capitalist aggression and conquest.

In the colonies and semi-colonies, a new, transformative form of socialism developed. The development of socialism in China illustrates many of the significant changes between the classical and transformative forms. This new form emerged from the intersection and integration of the socialist development logic and China’s own development logic.

In the case of China, after being isolated in the East for thousands of years, the country’s doors were forcefully opened through warfare by Western powers that were superior economically, militarily, technologically, and in terms of governance. This upheaval was not merely the result of a Western expedition against an ancient Eastern country, but also a destructive blow from a rising capitalist system against a declining feudalist order. The humiliation of China, the suffering of its people, and the tarnishing of Chinese civilisation sparked national resistance. Those who pursued national liberation and rejuvenation were in dire need of new sources of intellectual enlightenment. Faced with the predicament of internal intellectual stagnation, many Chinese intellectuals turned their gaze outward, particularly towards the highly developed Western countries. A number of Western ideas were introduced into China, with socialism and Marxism being just one of them. However, socialism resonated most with the Chinese people.

China’s encounter with and integration of socialism was the outcome of specific political, temporal, and spatial conditions. In particular, three factors led the Chinese people to embrace socialism.

1. The world’s peripheral regions, including China, were inherently opposed to the aggression of the Western capitalist countries. As an ancient civilisation with a long history of its own, China rejected the notion that it needed to be discovered, enlightened, or civilised by the Western powers. Having been invaded and plundered by Western capitalist countries in the nineteenth and twentieth centuries, China became more inclined towards socialism.

2. Socialism identified with and foregrounded the interests of the oppressed, namely,the working class within capitalist countries that resisted bourgeois rule as well as the colonies and semi-colonies that resisted conquest by capitalist countries. As an oppressed nation, the Chinese people were naturally inclined to identify with other oppressed peoples and, therefore, the Chinese people were attracted to socialism.

3. Socialism revealed the inherent sins and decay of capitalism. As the Chinese people’s understanding of Western capitalism deepened, the dark side behind its glamorous façade became increasingly apparent, including the evils of the slave trade, the global scramble for colonies, the plight of impoverished groups within capitalist countries, and, especially, the bloody slaughter between the imperialist countries during World War I. These injustices reflected the internal flaws and contradictions of the capitalist countries, thereby igniting the Chinese people’s yearning for a better society. Socialism represented the possibility of building an ideal society.

However, many colonies and semi-colonies around the world, beyond China, encountered socialist ideas but did not similarly integrate them. Why then did socialism take root in China? The entrance of socialism into China and the Chinese people’s choice of socialism merely demonstrated the potentiality of the historical movement. To transform this potential into reality and yield fruitful results, several other crucial conditions were undoubtedly necessary. These conditions included the presence of an exemplary vanguard organisation, a generation of youth willing to sacrifice everything, intellectuals who empathised with the toiling masses, and leaders who possessed a deep understanding both of China’s national conditions and the essence of Marxism. In the twentieth century, all of these conditions were met within China. Therefore, socialism was able to take root and blossom on Chinese soil.

The entrance of socialism into China changed the nature of social transformation in China. In the blueprint of world capitalism, China was situated on the periphery, subordinated to the capitalist core, and consigned to foreign domination. Whether China developed and overcame its semi-feudal and semi-colonial status was irrelevant to the core capitalist countries. These countries sought to define any social transformation within China and ensure that it was carried out by political agents that would direct it towards capitalist homogenisation and the interests of the core. This blueprint was terminated after socialism arrived in China as a different vision of social transformation emerged. The Communist Party of China (CPC) took the place of the country’s bourgeois political parties and became the leader of China’s social transformation. In this process, the working class, together with the peasantry and other classes, overthrew the bourgeoisie and became the driving force in China’s social transformation. The blueprint of China’s social transformation was fundamentally redrawn, and now pursued the following aims: opposition to the aggression, oppression, and exploitation of foreign capitalism in China; opposition to foreign capitalism’s support for reactionary forces in China; an end to the rule of feudalism, bureaucratic capitalism, and imperialism in China; and the achievement of national liberation and independence. Socialism outlined a revolutionary vision for China that completely overturned the content and methods that had been put forward by the bourgeoisie.

The socialist vision for social transformation also changed how China approached the building of a modern state. After the People’s Republic of China (PRC) was founded in 1949, the new state did not choose a capitalist development path, but rather, pursued a direct transition to socialism. Accordingly, the entire process of state construction followed this principle, shaping the construction of China’s basic political, economic, and social systems. Furthermore, the state and its institutions were built based on China’s specific conditions and aimed to ensure that the Chinese people were masters of the country. Key features included the leadership of the CPC, the system of a people’s congresses that extended from the local, village-level to the national-level, the system of multi-party cooperation and political consultation, the system of ethnic regional autonomy, and the system of community-level participatory governance. In this manner, China was able to construct a modern state and attain long-term political stability.

Finally, socialism reset China’s approach to modernisation. As humanity transitioned from agricultural to industrial societies, European countries led the initial process of modernisation thanks to the first-mover advantage that they gained from the industrial revolution. During their expansion, these countries imposed incomplete and subordinate forms of capitalist modernisation onto many developing countries, including China. This process was not smooth, but was characterised by setbacks, stagnation, and failures. After the Chinese Revolution, the PRC pursued a sovereign, non-capitalist path to modernisation. The CPC effectively mobilised and organised hundreds of millions of Chinese people to vigorously promote China’s industrialisation, striving to create the material foundation for socialism. This process took place in a hostile international environment and experienced a series of twists and turns during the initial decades after the revolution. By the late 1970s, a new path for China’s modernisation had opened up: the socialist market economy, active participation in the world economy, and the pursuit of common prosperity. Following the initiation of reform and opening up, China achieved a miracle of long-term rapid economic development, making great strides in industrialisation, urbanisation, technological advancement, developing the market economy, and pursuing international exchanges. These efforts have placed China at the forefront of the world’s modernisation tide.

The preceding paragraphs offer a general outline of how new forms of socialism and socialist development have emerged, with particular reference to the case of China. The emergence of a transformative form of socialism in China does not represent a general process of socialist development, although it may have implications that are relevant for other countries. Rather, the birth and growth of this new form vividly illustrates the diverse nature of socialist development.

Building a New Form of Socialism That Can Surpass Capitalism through Self-Improvement

In the mid-nineteenth century, socialism emerged in Europe and took its initial form, based on a starting point of advanced capitalist development. This original form has not disappeared and continues to slowly grow. It has mainly manifested in criticisms of capitalism at the ideological and cultural level, as well as social and political movements that strive to advocate for the interests of the oppressed classes. However, this form of socialism still has a long way to go before it can ascend to a dominant position and replace capitalism. Reasons for this include the divisions and variations within the socialist movement itself, as well as capitalism’s extraordinary resilience and capacity for adaptation. Fundamentally, however, socialism has not grown in the developed capitalist countries as it has in developing countries due to the absence of vanguard parties in the former. As a result, capitalism has been able to operate in a normal manner.

In the twentieth century, the socialist movement opened up new development opportunities in non-capitalist regions of the world. Developing countries, such as China, chose not to embrace the path offered by core capitalist countries and severed their ties with capitalism, becoming new areas of growth for socialism. Faced with pre-capitalist or semi-capitalist societies, and situated in historical positions of relative backwardness in terms of economic, political, cultural, and social development, these countries faced challenges that could not be answered by classical theories on the direct transition from capitalism to socialism. Fortunately, they demonstrated unprecedented historical initiative and creativity by pursuing socialist-oriented revolutions, socialist-oriented nation-building, and socialist-oriented modernisation. As a result, completely different theories and practices of socialist construction took shape in developing countries, along with new forms of socialist development.

How will socialism continue to develop and progress in the twenty-first century? This is a question of concern for all socialist thinkers and practitioners. Of course, the aforementioned forms of socialist development and late-starter modernisation remain important in developing countries and non-capitalist regions. At the same time, as socialism continues to develop in China, a further new form is emerging. Having attained socialist modernisation, China’s social productive forces, technological strength, overall national strength, and achievements in other aspects of development are demonstrating the possibility of socialism surpassing capitalism as well as the superiority and potential of socialism. For this new form of socialism to strengthen, China must advance beyond its current level of development to a higher level.

This new form cannot simply be an extension of the existing transformational form of socialism, but rather a meaningfully advanced form. In a certain sense, this new form entails a return to classical Marxism, as it must take up the question of how to transcend the capitalism of the core countries (although from the outside). The new form aims to surpass capitalism through the self-improvement of socialism.

Objectively speaking, this new form has just begun to emerge. We are not yet able to fully grasp its overall direction and inherent laws, but can only provide a rough outline of its basic contours. To strengthen this new form of socialism in China, the following areas of development are key.

1. Develop a deep and unified theoretical understanding of socialism and cultivate corresponding abilities to realise a higher level of development. The CPC, which leads the development of socialism in China, needs to engage in deep thinking, comprehensive planning, and long-term strategising, while adapting to the unfolding situation. It is important for the party to establish this foundation and build upon it for further learning, to unify its thinking, and to gradually establish an ongoing process of self-growth. In particular, it is crucial for the party to develop a comprehensive understanding of the country’s level of development, bottlenecks, favourable and unfavourable conditions, and operational mechanisms, along with an understanding of the practical experiences of capitalism in the United States and Europe.

2. Strengthen overall development. China’s level of development is not consistent across different fields. Economic, political, cultural, social, and ecological development varies in terms of progress, prioritisation, and imbalances. It is necessary to promote balanced and integrated development in these five fields.

3. Promote high-quality development of productivity and enhance the material foundation. Despite China’s large strides in catching up with and, in certain respects, surpassing the economic development of the core capitalist countries, the country still has a long way to go in terms of further developing productivity, productive efficiency, advanced technology, and material wealth. Without this, the inherent advantages of socialism cannot be fully realised.

4. Strengthen institutional maturity and unique governance advantages. Building on the consolidation of existing, unique institutional and governance advantages, concrete efforts should be undertaken to accelerate this process. Only by doing so can China develop institutional strength on par with the institutions of Western capitalism, which have been in place for hundreds of years.

5. Strengthen the inherent advantages of socialism. Compared to capitalism, socialism has many unique advantages, such as making the people the masters of the country; the people-centred approach of the ruling party, which is not guided by personal privileges and self-interest; the steadfast pursuit of common prosperity to prevent extreme wealth inequality; concerted efforts to maintain the party’s progressive nature, integrity, and strong leadership; and the emphasis on social harmony and avoiding fundamental conflicts or confrontations among the people. These advantages need to be valued and carefully nurtured. On top of this, a new system should be built to pool and mobilise resources nationwide for major issues.

6. Strengthen cultural and intellectual power. Being a civilisational nation and state is of utmost importance to China. Chinese civilisation has distinct characteristics in language, culture, and thought. The integration of Marxism and the emergence of a new form of socialism in China owes much to their compatibility with Chinese culture, which has always been deeply rooted in society and people’s daily lives. Efforts should be made to creatively transform China’s valuable cultural resources into more proactive cultural and intellectual strength. China should also work together with other cultures to highlight the value of human diversity.

7. Highlight the global comparative advantages of socialist development. China’s development has created global comparative advantages in some fields, even relative to developed capitalist countries. China has advanced the modernisation of a country of 1.4 billion people, surpassing the combined modernisation of the developed capitalist countries in scale and scope. Moreover, China’s modernisation has been achieved at a faster pace, with lower social costs and broader inclusivity, and using a more peaceful approach. This is the greatest experiment in modernisation in human history. China has also taken the lead in areas such as renewable energy, ecological protection, poverty alleviation, and technological development, with impressive achievements comparable to those of developed capitalist countries. Through the Belt and Road Initiative, China has embarked on an ambitious, cooperative developmental project with the countries of the Global South, encouraging their own pursuits of modernisation. To address the world’s common challenges, China has put forward the concept of building a ‘community with a shared future for humanity’ (人类命运共同体, rénlèi mìngyùn gòngtóngtǐ) and a range of proposals to promote global peace and development. China welcomes and embraces cooperation, competition, and different forms of modernisation and development around the world. As China’s own modernisation continues to advance, its international comparative advantages will become more prominent. As for hostile attempts by certain countries to contain China, China will respond with sufficient intelligence and capability.

The wheels of progress are racing forward, as we advance through the third decade of the twenty-first century. What excites all socialists is the emergence of new forms of socialism. Building off more than a century of socialist development, in a way, we seem to have returned to the era of Marx and Engels, who continuously pondered over how socialism would surpass capitalism and become its gravedigger. Today, we can see that socialism is better than capitalism at doing what the latter purportedly does best, while also successfully accomplishing many things that capitalism cannot. Socialism in China continues to grow stronger and strives to comprehensively surpass even the most advanced forms of contemporary capitalism, as Marx and Engels envisioned, and create a better society for humanity. Faced with this emerging new form of socialism, we need a new sense of consciousness.

‘The Third Wave of Socialism’ (社会主义的第三次浪潮) was originally published in Wenhua Zongheng (文化纵横), issue no. 3 (June 2021).

Capitalism Is Facing a Major Crisis

The 2008 financial crisis and the global COVID-19 pandemic have made clear that capitalism is facing a major crisis. The global economy has experienced prolonged stagnation and decline, widespread unemployment, profound wealth disparities, excessive debt, and asset bubbles. Most tragically, this has been accompanied by a significant loss of human life. The current crisis of global capitalism is the largest and most severe since the Great Depression (1929–1933).

Within this crisis, the limits of capitalism – market, technological, and ecological – have become increasingly apparent. First, new markets and sources of profit have grown scarce, leading to a diminishing driving force for capital accumulation. Second, although crisis-driven technological innovation has remained active, the benefits of such innovation are increasingly concentrated in the hands of a few, leaving the large majority of people marginalised within the current capitalist system. Third, the Earth’s ecosystem can no longer sustain the pressures imposed upon it by capitalist modes of production and lifestyles, as the world’s environmental capacity has been pushed to its limit.

The means traditionally used to resolve capitalist crises have failed, one by one, under the current crisis. After nearly four decades of neoliberalism, capitalist governments are facing a public spending crisis – their push for even more structural economic reforms to stimulate private capital is at odds with the need to maintain the minimum levels of social welfare. Quantitative easing policies have repeatedly created enormous asset bubbles and debt spirals, exacerbating the already severe wealth disparities.

Under this crisis, there has been a resurgence of many of the features that characterised the global capitalist landscape prior to World War I and World War II: the growth of populism, militarism, and fascism; the intensification of internal social divisions; an increase in hostility and zero-sum competition between nations; and trends toward deglobalisation and bloc politics. As international tensions rise, so too does the possibility of another global war.

Crises ignite wars and wars lead to revolutions. This has been a recurring theme in the history of the capitalist system. In the third decade of the twenty-first century, amid this major crisis, will capitalism undergo profound reforms and overcome the crisis? Or is this capitalism’s ‘Chernobyl moment’, as it heads towards its ultimate demise?

History has once again arrived at a critical juncture.

The Three Waves of Socialism

As a critique of and movement against capitalism, socialism has always coexisted alongside capitalism, serving as a powerful counterweight and constantly seeking alternative paths to overcome and replace capitalism. Since the birth of the First International (1864–1876), the global socialist movement has experienced three major waves.

The first wave occurred in nineteenth-century Europe as the European labour movement gradually transitioned from a state of being to a state of self-awareness. The main features of this period included the birth of Marxism, the establishment of international labour organisations, and the initial attempts to carry out a socialist revolution, such as the Paris Commune of 1871. The first wave of socialism propelled the political awakening and consciousness of the working class and gave rise to working-class political parties in a range of countries. However, during this wave, a socialist state form would not yet emerge.

The second wave began as World War I came to an end, with the October Revolution in 1917, and lasted until the dissolution of the Soviet Union and the communist states in Eastern Europe from 1989 to 1991. Across the world, a large number of socialist states emerged, first in the Soviet Union and Eastern Europe, and, after the end of World War II, in China, Cuba, Korea, Vietnam, and elsewhere. Together, these countries formed a global socialist system or camp. In addition to this state system, during the Cold War, a large section of the international socialist movement was concentrated in the national liberation movements of Asia, Africa, and Latin America, many of which identified as socialist or were significantly influenced by socialism. Thus, the two main characteristics of the second wave of socialism were the emergence of the socialist state form, with widespread public ownership and economic planning, and the national liberation movements.

After the end of the Cold War, socialism suffered significant global setbacks. However, despite this, a new wave would emerge. The third wave, which began to form after China launched its reform and opening up in the late 1970s, was able to withstand the severe shocks and tests following the dissolution of the Soviet Union and the communist states in Eastern Europe. While socialism was at a low point worldwide, China remained committed to socialism while also pursuing reform and opening up, gradually exploring a path known as socialism with Chinese characteristics. The main feature of socialism with Chinese characteristics has been the incorporation of a market economy into the socialist system, gradually forming a socialist market economy. Today, just three decades after the end of the Cold War, socialism with Chinese characteristics has undergone a rapid rise, becoming a crucial force that is reshaping the world order and humanity’s future. Although this wave of socialism is still in its early stages, it has already made a significant impact and attracted global attention, providing new options for countries that seek to pursue a path of independent development and posing a strong challenge to those who contended that capitalism marked the ‘end of history’.

Limitations of the Second Wave of Socialism

Before proceeding further in assessing the current reality and future prospects of the third wave of socialism, we must first revisit the second wave of socialism and understand the reasons for its setback.

With the October Revolution in 1917 and Chinese Revolution in 1949, socialism swept the globe, not only forming a camp of states that posed a significant threat to capitalism but also igniting a wave of national liberation movements in the vast Third World of Asia, Africa, and Latin America. In the decades after World War II, the capitalist world system was in a precarious situation. As socialism spread globally, socialist countries widely implemented Soviet-style planned economies and public ownership systems, achieving the initial stage of industrialisation and building socialist national economic systems.

However, the Soviet-style planned economy and pure public ownership model had several profound drawbacks. First, the planned economic system was unable to allocate social and economic resources in an effective and flexible manner, resulting in a rigid and distorted national economic system that could not adequately respond to indicators from the real economy. Second, the pure public ownership and egalitarian distribution system lacked sufficient incentive mechanisms for labour at the intermediate and micro levels, leading to a lack of constructive competition and pressure between enterprises and workers, and resulting in a generally low level of economic efficiency. Third, the restrictions on and elimination of private and commodity economies violated the law of value and surpassed the stage of development of social productive forces. This led to a long-term, systemic failure to meet the complex needs of economic and social life and to realise significant improvements in people’s quality of life. Finally, over time, Soviet-style planning and economic management led to the development of an increasingly inward and closed system, characterised by bureaucratism and dogmatism, and a lack of sensitivity and responsiveness to technological progress and organisational innovation.

While the significant setbacks that the second wave of socialism experienced in the 1980s and 1990s can be attributed, in part, to external factors such as the strength of the capitalist world system and the fragmentation of the socialist camp, ultimately, the inadequate economic and social operating systems and institutional mechanisms within socialist countries were the fundamental determining factors. The unsustainability of these internal systems drove the dramatic changes in the Soviet Union as well as China’s shift towards reform and opening up.

Socialism with Chinese Characteristics and the Third Wave of Socialism

With the continuous advancement of reform and opening up, socialism with Chinese characteristics has taken shape as a development path that is distinct from both traditional Soviet-style socialism and classical free-market capitalism. China’s developmental path and theories are confidently stepping onto the world stage. Although socialism with Chinese characteristics is not a static model and China’s practices undergo continuous experimentation, after more than four decades of exploration, six major features can be identified.

First, priority has been given to the development of productive forces. Socialism with Chinese characteristics dares to learn from reasonable economic forms of capitalism and allows the development of the private economy to promote the rapid development of advanced productive forces. At the same time, the development of the state-owned economy has been strategically planned in key sectors, forming a complementary relationship with the private economy and creating a mixed ownership structure.

Second, China has promoted the close integration of its socialist economic foundation and relations of production with the market economy, to gradually establish a socialist market economic system.

Third, while opening up and integrating with the global capitalist system, China has always focused on maintaining national sovereignty and ensuring the continued socialist nature of the Communist Party of China (CPC). China remains vigilant against the risk of deviating towards capitalism due to the demands of developing a market economy.

Fourth, China has sought to address issues related to social justice and inequality through development. Development can bring about a growth in wealth but, for various reasons, this wealth may also lead to increased social divisions. Only further development can produce the social wealth and material basis to resolve these social divisions and inequalities. Under socialism with Chinese characteristics, development has been the primary avenue to address social justice issues, while other methods have been secondary. This has required dynamic, proactive measures, rather than rigid and one-size-fits-all approaches.

Fifth, the state has also employed a number of other measures to balance wealth inequality within the socialist market economy. Large-scale poverty alleviation campaigns have been carried out to include marginalised groups in the market economy and help them escape poverty through targeted efforts. In addition, the practice of paired-up assistance connects developed areas, public institutions, enterprises, and other actors with poor areas to transfer resources and assistance to underdeveloped regions. Meanwhile, to address regional inequalities, transfer payments from more developed eastern regions to underdeveloped central and western areas have helped to supplement gaps in fiscal revenue and expenditure capacity. Such measures are difficult to imagine, let alone implement, in capitalist countries where private property is considered sacrosanct and where electoral processes only uphold the vested interests of the dominant class.

Sixth, the CPC is not beholden to the narrow interests of certain sectors of society. To maintain this position, the CPC must remain free from the infiltration and control of capital, as well as overcome the influences of populism and rigid egalitarianism, maintaining a dynamic balance between economic vitality and social equity.

The Relationship between Socialism and the Market Economy

History has demonstrated that it is impossible to artificially eliminate the market economy under socialism. The limitations and ultimate failure of traditional Soviet-style socialism serves as evidence.

The market economy is an ancient economic form, and its law of supply and demand spontaneously regulates human economic behaviour. It can be combined with feudalism, capitalism, and socialism. The degree of combination depends on the surplus of social products. Generally speaking, the greater the surplus, the more developed the market economy becomes. As Deng Xiaoping (邓小平) said, ‘There is no fundamental contradiction between socialism and a market economy. The question is how to develop the productive forces more effectively’.^[1] Similarly, he stated, ‘A planned economy is not equivalent to socialism, because there is planning under capitalism too; a market economy is not capitalism, because there are markets under socialism too. Planning and market forces are both means of controlling economic activity’.^[2]

In the movement of a modern market economy, capital is the main actor. Capital has a dual nature: it is the most efficient force for resource allocation in the market economy, but it can also manipulate and monopolise the market. Fernand Braudel, French historian and leading scholar of the Annales school of historiography, argued that the market economy could not be equated with capitalism. For Braudel, the market economy ‘is really only a fragment of a vast whole. For by its very nature, the market economy is reduced to playing the role of a link between production and consumption, and until the nineteenth century it was merely a layer – more or less thick and resilient, but at times very thin – between the ocean of daily life that lay stretched out beneath it and the capitalistic mechanism that more than once manipulated it from above’.^[3] Distinct from the market economy, Braudel wrote that ‘capitalism is the perfect term for designating economic activities that are carried on at the summit, or that are striving for the summit. As a result, large-scale capitalism rests upon the underlying double layer composed of material life and the coherent market economy; it represents the high-profit zone’.^[4] In today’s global market economy that is dominated by modern capitalism, internal forces that resist capitalism continue to emerge, giving rise to demands and movements for economic and social equality. These movements will gravitate towards and advocate for socialism to address and overcome capitalism’s inequalities. As such, socialism is also an internal force of the market economy, an organic component that naturally opposes capitalism.

In addition to capital, the government is another key actor in a modern market economy. The government is a product of the market society’s demand for order and rules. Its existence is not an external force imposed on the market but an intrinsic requirement of the market economy. Even in a market society without a government, quasi-governmental entities such as guilds and chambers of commerce will emerge. Besides regulating and managing the market economy, the government often promotes and develops the market, especially during the early stages of market economies in developing countries. In fact, the government frequently becomes the driving force behind the market economy. Therefore, it is fundamentally incorrect to place the government and the market in complete opposition to one another as dichotomised entities. Liberalism regards the government as an absolute evil, while Soviet-style socialism directly equates the market economy with capitalism – both make formalistic errors.

A socialist market economy is one in which the movement of the market economy is guided by socialist values. On the one hand, this economic system employs national strategic regulation, fully leverages the fundamental role of the market economy in organising production, exchange, guiding consumption, and distribution, and fully harnesses the leading role of capital in developing advanced productive forces. On the other hand, it utilises the powerful state-owned capital and the socialist superstructure to restrain and balance private capital, overcome the inherent tendency of the market economy towards social division, and avoid capital’s control over economic and social life.

The socialist market economy is a system that utilises the decisive role of the market economy while optimising the government’s function. It represents the combination of the modern market economy and the socialist mode of production.

Maintaining the Socialist Character of a Socialist Market Economy

Capitalism constructs a superstructure and ideology that are compatible with its mode of production according to the logic of capital’s operation. Under the conditions of a socialist market economy, this logic does not change. The spontaneous movement of the market economy and the pursuit of profit by capital entities within it will continuously erode the superstructure and ideology of socialism, and may lead to the imbalance or even disintegration of the socialist market economy, leading society towards capitalism. In the era of global capitalism, the challenges faced by socialist market economies within sovereign nations become even more apparent as capital penetrates national borders. How then has China been able to maintain the socialist character and direction of its socialist market economy?

First, the key lies in upholding the leadership of the CPC and ensuring that the socialist nature of the party remains unchanged. In the socialist market economy, the CPC has fully leveraged the role of capital in developing advanced productive forces and promoting the continuous growth of social wealth, while ensuring that the party is not infiltrated nor manipulated by capital. The party has actively controlled capital and made it serve the majority of the people. General Secretary Xi Jinping has emphasised the essential relationship between the party’s leadership and socialism, stating that, ‘The leadership of the Communist Party of China is the defining feature of socialism with Chinese characteristics and the greatest strength of the system of socialism with Chinese characteristics’.^[5]

Second, the stable operation of the socialist market economy also results from the fact that China has accumulated a large amount of state-owned assets during the past seventy years of development, including state-owned enterprises, state-owned financial institutions, and state-owned land. State control of these massive strategic assets forms the foundation of the CPC’s governance and ensures the party’s independence from capital forces, allowing it to govern based on the fundamental interests of the country and the people.

Under the conditions of a socialist market economy, state-owned enterprises and state-owned capital must also operate and compete according to the laws of the market economy. The logic of the market and capital deeply penetrate the daily behaviour of not only private enterprises, but also state-owned enterprises. Therefore, it is particularly important to ensure that the managers of these massive state-owned assets do not become agents of the bourgeoisie, so as to prevent managers from transforming state-owned assets into private assets or establishing internal control that is beholden to bourgeois interests. To maintain the socialist character of the socialist market economy, the CPC must ensure both the operational efficiency and the continued state ownership of these assets.

Third, the superstructure and ideology of socialism must be firmly controlled by the party. In industries or sectors such as education, publishing, and media, the pursuit of economic benefits must be subordinate to social benefits. The logic of the market economy should not dominate these sectors, and the party’s leadership must be integrated into their daily operations. If socialism does not provide ideological and cultural leadership, capitalism inevitably will.

Fourth, under the conditions of a market economy, the CPC has led the development of civil society and non-governmental organisations. The growth of these social forces is an inevitable phenomenon in a market economy. Due to the differentiation effect of the market economy, demands from different interest groups arise to address issues such as wealth inequality, environmental degradation, the demoralisation of society, and other problems generated by private capital. Due to China’s strong historical tradition of ‘bureaucratic feudalism’, the development and construction of these social forces can help overcome excessive bureaucracy and formalism within government departments. Therefore, the party has led the development of these social forces and encouraged them to organise, to promote the stable and long-term development of the socialist market economy.

Promoting the Third Wave of Socialism

At a time when the contemporary capitalist world system is facing tremendous crises, the opportunity for a new global wave of socialism has once again emerged. Socialism with Chinese characteristics is likely to be a key factor in initiating this wave. As China continues to rise and becomes a leading global power, the Chinese path of development will attract more attention as a viable alternative mode of production and way of life, promoting the formation of a new global socialist system and value system that is increasingly accepted by people around the world.

At the same time, during this historic transition period, socialism with Chinese characteristics will also face particularly acute challenges and dangers. Since the 2008 financial crisis, and especially since the COVID-19 outbreak, the strengths of Chinese socialism have become increasingly evident on the international stage. China has turned many of these crises into opportunities, propelling the country to a higher level of development and enhancing its governance system and capacity. The stark contrast between China and Western countries in these respects has fundamentally shaken the narrative of Western capitalism; something that has a greater impact than mere military power and economic growth rates.

In response, various forces of international capitalism are mobilising against China. Attacks and smears from liberal, nationalist, and populist political forces are endless. Even some international left-wing forces harshly criticise China on issues of democracy, human rights, and environmental protection, and even question whether China is truly socialist. Since the Biden administration came to power in the United States, alliance politics have ramped up on a global scale. A US-led bourgeois ‘holy alliance’ is rapidly coalescing under the pretext of containing China.

The emerging third wave of socialism will undoubtedly face a dark night and experience even more intense turmoil and chaos within the capitalist world system. In response, Chinese socialists must be prepared.

Bibliography

Author’s Notes