Debates continue among Chinese officials and analysts as to whether the United States has the ability and willingness to reduce or even completely cut off China’s access to the US dollar system, reflecting a sense of uneasiness in Beijing about the potential ramifications of a financial war with Washington.

The general consensus, according to published reports and views, is that Washington will not go to this extreme, as it has with Iran and North Korea, because of the risks that such a drastic move would pose to the US itself and to the global economy.
However, for China, the risk remains real that the US could use the US dollar’s hegemony to inflict pain on China if relations continue to deteriorate.

Washington has already announced that it will penalise individuals involved in undermining Hong Kong’s autonomy and punish Chinese financial institutions that continue to do business with them – a relatively targeted approach to financial sanctions. A big question is whether these sanctions could escalate.

Wang Yongli, a former vice-president at Bank of China and a former member of the board of Swift – the international financial payments system – wrote in a note over the weekend that it would be “highly complicated and impractical” for the US to exclude all Chinese and Hong Kong financial institutions from the US dollar payments system.

“The United States has huge economic, trade and financial interests in Hong Kong. Kicking Hong Kong out of Swift would not only harm Chinese financial institutions in the city, but would severely affect all international institutions in Hong Kong, including American institutions,” Wang wrote.

Swift, the Society for Worldwide Interbank Financial Telecommunication, is a network used by banks around the world to send and receive information about financial transactions. It is one of the pieces of infrastructure that underpins the anchor role of the US dollar in international trade and investment.

Foreign banks have correspondent relationships with US banks, through which they conduct US dollar transactions. The US government can order US banks to stop processing transactions with certain individuals, institutions and countries, denying them access to the US dollar payments system.

Wang added that China must not panic, but must calmly respond to potential US sanctions, because if the US cuts off Hong Kong from the US dollar payment system, it will “shoot itself in the foot” and deeply affect global demand. This, he said, would likely promote the establishment of a new international payment and settlement system to replace the current US dollar-denominated one, and, at the same time, pose a major threat to world peace.

A senior official in Beijing who is close to the country’s central bank told the South China Morning Post that he thinks it would be impossible for the US to exclude all Chinese institutions in Hong Kong from Swift, because doing so would be a major escalation in the confrontation between the two countries.

Ding Shuang, chief China economist at Standard Chartered bank, agreed that the US is unlikely to impose financial sanctions on Hong Kong as a whole but may sanction some individual Chinese banks in the city.

Relations between the world’s two largest economies have deteriorated sharply over a sea of issues including the trade war, the Covid-19 pandemic, territorial disputes in the South China Sea, the new national security law, and arms sales to Taiwan.

Last week, US President Donald Trump signed an executive order to end Hong Kong’s special status under US law, as well as the Hong Kong Autonomy Act, which provides for mandatory sanctions against individuals and entities seen as contributing to the erosion of Hong Kong’s autonomy, and, after a year, penalties for banks that still do business with them.

Despite economists repeatedly arguing that the risk of the US cutting off Hong Kong or China from Swift is low, Chinese state media and officials have continued to discuss the potential consequences and what China could do to mitigate the risks.

“Although the US has a great influence on Swift, the organisation is not ruled by it. Given the scale of China’s economy and finance, the probability of being completely cut off from the US dollar payment and settlement system is extremely low,” the Securities Times, a newspaper affiliated with People’s Daily, the Communist Party’s mouthpiece, said on Monday.

A commentary in the Global Times, the state-backed nationalistic tabloid, said last month that China “must be cautious of the US’s malicious intentions”. It also warned that, for the US, cutting off China from Swift would be like “drinking poison to quench its thirst”.

“Blocking China from Swift would cause big trouble and losses for China, but it would also harm the US. Although the US wouldn’t immediately lose its superpower status, US dollar hegemony would be doomed to collapse. After all, China has an economy second only to the United States, with huge dollar reserves and dollar bonds in its hands,” the commentary said.

Guotai Junan Securities, the Shanghai-based investment bank and securities company, said in a note on Monday that if the US suspends China’s access to Swift, the mainland could lose US$300 billion in trade per year. It will also lose more than US$90 billion in foreign direct investment in China and more than US$80 billion in outward foreign direct investment.

“All Chinese state-owned commercial banks, as well as the stock exchanges in Shanghai and Shenzhen, have joined Swift. Once they are cut off from the system, meaning the US imposes financial sanctions on all Chinese commercial banks, the source of US dollars for these banks will completely dry up,” the report warned.

For Hong Kong, the worst consequences would be the city losing its status as an international financial hub, as institutions in the city would be unable to obtain US dollars, risking the collapse of Hong Kong’s US dollar peg and a drastic depreciation of the Hong Kong currency in the short term, the report said.