A sharp escalation in tensions with the US has stoked fears in China of a deepening financial war that could result in it being shut out of the global US dollar system — a devastating prospect once considered far-fetched, but now not impossible.
Chinese officials and economists have in the past few months been unusually public in discussing worst-case scenarios under which China is blocked from US dollar settlements, or Washington freezes or confiscates a portion of China’s huge US debt holdings.
Those concerns have galvanized some in Beijing to revive calls to bolster the yuan’s global clout as it looks to decrease reliance on the greenback.
Some economists even float the idea of settling exports of China-made COVID-19 vaccines in yuan, and are looking to bypass the US dollar with a digital version of its currency.
“Yuan internationalization was a good-to-have. It’s now becoming a must-have,” said Shuang Ding
(丁爽), head of Greater China economic research at Standard Chartered and a former economist at the People’s Bank of China (PBOC).
The threat of financial “decoupling” is becoming “clear and present,” Ding said.
Washington has unleashed a barrage of actions penalizing China, including proposals to bar US listings of Chinese companies that fail to meet US accounting standards and bans on the Chinese-owned apps TikTok and WeChat.
Further tension is expected in the run-up to the US presidential elections on Nov. 3.
“A broad financial war has already started ... the most lethal tactics have yet to be used,” said Yu Yongding (余永定 ), an economist at the state-backed Chinese Academy of Social Sciences who previously advised the PBOC.
Yu said the ultimate sanction would involve US seizures of China’s assets in the US — Beijing holds over US$1 trillion yuan in US government debt — which would be difficult to implement and a self-inflicted wound for Washington.
However, while calling US leaders “extremists,” Yu said a decoupling was not impossible, and China should make preparations.
China Securities Regulatory Commission Vice Chairman Fang Xinghai (方星海) said China is vulnerable to US sanctions and should make “early” and “real” preparations.
“Such things have already happened to many Russian businesses and financial institutions,” Fang said at a forum in June organized by Chinese media outlet Caixin.
Guan Tao (管濤), former director of the international payments department of the Chinese State Administration of Foreign Exchange also said Beijing should ready itself for decoupling.
In a report he coauthored last month, Guan called for increased use of China’s yuan settlement system, Cross-Border Interbank Payment System, in global trade. Most of China’s cross-border transactions are settled in US dollars via the SWIFT system, which some say leaves it vulnerable.
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