Chinese researchers and former officials have increased the urgency of their calls for Beijing to insulate the country from the potential risk of being cut off from the US dollar payments system, as new US government sanctions are expected to punish officials involved in the implementation of Hong Kong’s new national security law, and the financial institutions that do business with them.
There also appears to be a growing concern in Beijing that the United States could take advantage of the dominant role of the US dollar in global payments and trade to inflict pain on China. At the same time, the jury is still out on whether it is possible for China, which has been trying for the last decade to dethrone the US dollar as the anchor currency in the world, can really distance itself from the dollar payment system.
On Tuesday, a research team led by Guan Tao, chief economist with the investment banking arm of the Bank of China – one of the nation’s “big four” state banks – called for China to build its own financial transaction network, thereby diversifying investment and financing away from the US dollar system and, if necessary, changing the currency anchor in the domestic foreign exchange market.
Guan, former head of international payments under the State Administration of Foreign Exchange (SAFE) and a member of the China Finance 40 Forum, a group of state researchers, was the latest to reflect on the escalating trend toward China-US decoupling.
“A diversification of cross-border payment and settlement channels is key to increasing [China’s] risk-resistance ability,” according to the research note. Guan’s team suggested countermeasures such as creating a new messaging system for financial transactions between Hong Kong, Macau and the mainland based on the country’s existing Cross-border Interbank Payment System, which was launched in 2015, as well as further connections with non-US dollar settlement agencies.
If Washington imposes sanctions on Chinese financial institutions, it may do so through the Clearing House Interbank Payments System (Chips) – the privately owned US payments system through which the vast majority of domestic and international transactions in US dollars flow – rather than via the Belgium-based Society for Worldwide Interbank Financial Telecommunication (Swift), the international messaging system for money transfers.
“If the US excludes some important Chinese banks or sovereign institutions from Chips, China should consider halting the use of the US dollar as the anchor for the domestic foreign exchange market and switch to the euro or [the International Monetary Fund’s] Special Drawing Rights,” the report said.
However, Wang Yongli, a former vice-president with Bank of China who had been a board member at Swift, said in an opinion piece on his social media account earlier this month that it was “unreasonable” for any county to develop an alternative messaging system to Swift.
Wang noted that China launched its own cross-border yuan payment system in 2015, an answer to the Chips system in dollar settlement, but must still rely on Swift for cross-border payment messaging services.
“The actual effect will be very limited if we rely on an alternative international payment and settlement system” to mitigate harm from US financial sanctions, Wang wrote. The fundamental reality is that the US dollar has considerably more global influence and use than the yuan does.
The threat of being cut off from the US dollar payment system and Swift is now a matter of heated debate among Chinese officials and advisers, with Fang Xinghai, vice-chairman of the China Securities Regulatory Commission, warning of damage to the country’s financial system if Chinese institutions are sanctioned as some Russian and Iranian institutions have been in recent years.
Concerns focus on the passage of the Hong Kong Autonomy Act – Washington’s response to Beijing imposing a new national security law on the former British colony on July 1 – as the legislation authorises the US government to slap financial penalties on individuals seen as having curtailed Hong Kong’s autonomy and, after one year, imposing sanctions on financial institutions that continue to do business with them.
One possible sanction would be to reduce or entirely cut off a financial institution’s access to the US dollar payments system, potentially dealing a heavy blow to its international business. Because many of the individuals likely to be sanctioned by the US are Beijing or Hong Kong officials, it would be politically impossible for Chinese banks to stop doing business with them.
Such a threat could turn into immediate losses for Chinese financial institutions, as official data showed that about 76 per cent of Chinese banks’ overseas assets, or US$821.6 billion, are denominated in US dollars.
Chinese authorities have not yet elaborated on how they could reduce their dependence on the US dollar, but academics and bank professionals have laid a variety of solutions on the table.
Xu Qiyuan, a researcher with the Chinese Academy of Social Sciences, said it is very unlikely that Hong Kong and mainland Chinese institutions will be kicked out of Swift, given the systemic importance of China to the global economy and international finance. But the possibility of a “partial or mid-level sanction” against individual Chinese institutions has risen, Xu warned.
China should open its domestic market wider and integrate itself more deeply into the global economy so that it will become “too big or too connected to fail”, Xu said in an article published by Caijing Magazine on July 22.
And Liu Xiaochun, deputy president of Shanghai Finance Institute, suggested a tit-for-tat response to any US financial sanctions.
“If the US announces sanctions on specific Chinese institutions, China should consider ordering all trade with the US to be settled through the sanctioned banks in US dollars or yuan,” he said.
A number of Chinese economists have also suggested that Beijing promote further use of yuan, rather than the US dollar, in international trade and investment.
Lu Zhengwei, chief economist at Industrial Bank in Shanghai, said it would be difficult for a new currency to be accepted in the near future.
“The status of the US dollar formed under special conditions after World War II, and it has been working for decades,” Lu said. “It could hardly be replaced in the short term. Meanwhile, [building a non-dollar payment system] will be a long process – just like the rivalry between the two countries.
“The US should think about the aftermath [of cutting China off from the international payment system]. It would also hurt itself badly.”
Yuan internationalisation indeed looks to be a long-term project, as its current share of international payment transactions on the Swift system – less than 2 per cent – is far behind the US dollar’s share of more than 40 per cent.
However, Ding Zhijie, head of the SAFE’s research centre, said the Chinese currency now plays an anchor currency role in some regions.
“China should enhance its financial and monetary cooperation with Asian and Belt and Road countries to form a yuan-usage zone,” he said at the International Monetary Forum in Beijing last weekend.
Timing, perseverance, and ten years of trying will eventually make you look like an overnight success.