Israel’s central bank has added the Chinese yuan to its stockpile of reserves, which last year exceeded $200 billion. This is the first time in a decade that Israel has made such changes to its reserves, which so far have been kept in US dollars, euros and UK pounds.
Starting in 2022, the stockpile will also include Canadian, Australian and Japanese currency, in addition to yuan.
Israel’s move is hardly surprising, especially given that Israel is moving towards signing a free
trade agreement with China, reportedly by the end of 2022, Dr. Alex Coman, an expert of economics at Tel Aviv University, says.
According to the shaping deal reported by the Israeli press, there will be no customs duties on most Chinese goods in bi-lateral trade, while others will see a significant reduction in tariffs.
“If this agreement ends up being signed, Israel could become a pipeline through which the Chinese products will be streaming”, said Coman.
“And if this happens, the yuan will definitely get more significant because the Chinese currency will be used in part of the trade between the two states, so Israel is already preparing itself for such a scenario,” he added.
However, the central bank’s
decision to add yuan might not have been dictated by economic reasons alone, and several international reports, including
Bloomberg’s, suggest that another factor which pushed Israel to make the move was geopolitics.
Since 24 February, when Russia launched its military operation in Ukraine, the US as well as its Western allies have slapped multiple sanctions on Russia, in a bid to punish Moscow for its actions and crush its economy.
Responding to those actions, Russia started isolating the US dollar, announcing in March that countries hostile to Moscow would only be able to purchase its gas with Russian rubles. It has also kicked off negotiations with its key partners, such as India, China and Iran, mulling over the possibility of trading with them using local currencies. Additionally, it has encouraged other states to follow suit.
Those steps have weakened the US dollar, and this was probably the reason why Israel decided to take an unprecedented move and diversify its national currencies’ stockpile, moving away from the American currency.
US Won’t Like the Move
Coman says he has no illusions that Israel’s move will be unwelcome among officials in Washington. But he doubts they will do anything to punish the Jewish state for its actions or make it reverse its decision.
“Of course, they will frown because they feel that they have invested in us dramatically. But the question is whether there will be anything beyond that frustration. I highly doubt it”.
Another Israeli analyst, Amir Oren, who specialises in international relations, has also expressed his scepticism about possible US interference in the decision of Israel’s central bank.
“It is in the American interest to keep the Israeli economy stable,” he said. “And if the central bank believes that what can contribute to that stability is the Chinese yuan, why would Washington interfere?” he reasoned.
However, Israel has known instances where Washington has snooped into its dealings with China. One such occurrence took place in 2000, when, under American pressure, then-Prime Minister Ehud Barak cancelled a deal that stipulated the provision of Beijing with several Phalcon air-borne early-warning radar systems.
Another one occurred in 2019, when the Israeli city of
Haifa signed a 25-year contract with China enabling it to invest in its port. That move angered officials in Washington, and they warned Israel of severe repercussions if it dared to “take sides” in the great game among these superpowers. The Jewish state cracked under that pressure and although the project did go on, the involvement of the Chinese was limited.
The Israeli expert doesn’t believe the same pressure will be applied vis-a-vis the decision to include the yuan in Israel’s national reserves.
One of the reasons for this, says Coman, is the realisation that “Israel is a tiny player,” whereas the second one is that Washington understands the yuan is still unable to take over as the world’s leading currency.
“At this stage, it is better for China to have its currency devalued because it makes its products cheaper. So I would not rush to celebrate the yuan. Nor would I bury the dollar,” concluded Coman.
