China and four other leading high-growth economies have taken landmark steps toward lowering the importance of the dollar in international financial transactions — part of a seminal shift in the move towards a multicurrency reserve and trading system.

Addition of South Africa to the former BRICS format seems to have galvanized the grouping. The five countries agreed to expand use of their own currencies in trade with each other — an important step toward putting the dollar into a new downsized place. One key influence is the annual expansion of China’s trade volume with other core countries by 40% in 2010 — and the buoyancy looks set to continue. The BRICS’ state development banks, including the China Development Bank, agreed to use their own currencies instead of the dollar in issuing credit or grants to each other — and they will also phase out the dollar in overall settlements and lending among each other.

If the renminbi (the official currency of China) were to become a fully fledged reserve currency, of course, it would have to go down as well as up — marking enormous risks along the journey for the renminbi to assume a greater international role. For all of these reasons, Beijing will proceed with utmost caution in relaxing its restrictions for the currency to circulate freely overseas.

The last few days, make no mistake about it, mark an important step along this path — but there is a long way to go still.

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