According to Fang Xinghai, Russia’s experience has shown how excessive dependence on dollar transactions makes a country vulnerable to US sanctions.
Fang Xinghai made his statement, speaking at the Caixin Financial Forum. He pointed to a precedent when the US introduced sectoral sanctions, as well as restrictions against certain Russian companies and individuals, due to the 2014 Crimean crisis. Fang Xinghai said that China carried out the vast majority of its transactions in foreign markets in dollars using the SWIFT system, as well as the CHIPS system.
According to the head of the China Securities Regulatory Commission, these structures are controlled by the United States, which means that they can be used as tool to pressure other countries. Ultimately, any dollar transaction has to go through one of the American banks, so theoretically the United States can block any such operation. Fan Xinghai called for preparing for possible US financial sanctions not only mentally, but also physically: to start working on diversifying the system of international settlements and not to concentrate all foreign economic activity on the dollar.
Chinese and Western experts started speaking about the threat of the Sino-US trade war turning into a financial war after Trump signed the law on anti-Chinese sanctions for China’s alleged violation of Uighur rights. The law provides for financial sanctions against officials and organizations involved, as the US sees it, in infringing on the rights of Uighurs.
The sharply negative reaction on the part of the United States and several other Western states to Hong Kong’s national security law has also exacerbated the situation. All these events suggest that the United States may follow the ‘Russian’ scenario regarding China.
Indeed, there are similarities. US anti-Russian sanctions were introduced in 2013 with the Magnitsky Act, and continued due to the annexation of Crimea and the situation in southeast Ukraine. Later, to introduce new sanctions the US referred to the Salisbury incident, Russia’s alleged meddling in the US Presidential election or Russian hacker attacks. Today, similar charges are made against China; they are similar in their unsubstantiality and even absurdity: ‘oppression’ of Uighurs, ‘pressure’ on Hong Kong, China’s alleged misinformation about the COVID-19 pandemic, etc.
On the other hand, regardless of the US harsh rhetoric regarding China, Washington’s actions so far can be called modest. Trump hasn’t yet imposed any sanctions under the Uighur law: he explained this by his desire not to damage a trade deal with China. Depriving Hong Kong of a special trade regime with the United States is also not as scary as it seems.
The bulk of goods shipped from Hong Kong are re-exports from other countries or from mainland China. They were already subject to another customs regime. Finally, no special measures have been taken regarding China’s alleged disinformation either. As for a possible US exchanges listing rules tightening for Chinese companies, some experts associate this not only with sanction pressure. They believe that the scandal with the Chinese Luckin Coffee, which had falsified corporate sales data by at least $200 million, thereby deceiving investors, could have triggered that process. After that incident, the United States started insisting that the audit rules applicable to American companies listed on stock exchanges also apply to any other companies, including Chinese ones.
Theoretically, the US can cut any country off from the global financial system. This is confirmed by Iran and North Korea’s experience. But in the case of similar sanctions against China, there is another question: how will this affect the United States itself? According to the WTO, China accounts for 13% of global exports and 11% of global imports – these are the largest shares in global trade. If you remove the dollar from settlements for such a volume of transactions, this could create shocks within the US financial system. One shouldn’t forget that China is the largest holder of US treasury bonds. As of December 2019, China had $1.07 trillion worth of these bonds, or 5% of the entire US national debt. If China responds by selling off these debt securities, the US will face the problem of a sharp rise in the cost of borrowing.
Of course, individual sanctions are possible, but large-scale financial pressure on China on the part of the United States is unlikely, Jia Jinjing, assistant director of the Chongyang Institute for Financial Studies Renmin University of China, said. According to him, China’s involvement in the US financial orbit is very high. However, this does not mean that dependence on the dollar is not a problem. Due to the US intentions to pursue a policy of quantitative easing and increase dollar issuance, the stability of American assets value begs questions, the expert said.
“The current situation in the US money market is causing strong turbulence in the international financial system. The value of US assets denominated in US dollars is subject to systematic revaluation. This is not only a Chinese problem, but also a global problem that no one can avoid. At the same time, in this large environment, there is still a problem of financial flows. There are real risks, since in the past financial flow channels focused specifically on dollar flows. It’s impossible to introduce systemic financial sanctions against China because of its enormous size and the relatively turbulent financial situation in the United States. However, there’s no doubt that certain partial financial sanctions against China, such as sanctions on personal or corporate accounts, can be introduced”, he added.
Even with regard to Russia, which doesn’t occupy such a large share of global trade as China, US sanctions can be said to have been targeted. The United States has banned US banks from participating in the primary market for Russian sovereign debt and issuing loans to the Russian government. Meanwhile, there are no restrictions on the foreign trade activities of most Russian companies.
According to Jia Jinjing, the prices of Russian assets that were previously manipulated by Western countries headed by the United States, have, on the contrary, become fairer. This is perhaps the main lesson that should be learned from the Russian experience, he said.
“The anti-Russian sanctions imposed by the United States are also directed against enterprises and individuals, and cannot be applied to Russia as a whole. Previously, Russian assets were valued by Western countries, including the United States; and they manipulated their value. That made many Russian assets underestimated, and as a result, the Russian stock market was extremely passive. I think this is the main lesson. China is currently undergoing a major financial reform, and the stock market situation has been relatively stable recently. China continues expanding its financial openness. This makes China more financially proactive: the value of Chinese financial assets is not that vulnerable to external forces", he added.
Of course, in a situation, when conflicting data constantly comes from Washington, such as in a trade transaction situation, when Trump’s trading adviser Peter Navarro talks about terminating the transaction, and Trump refutes the statement a couple of hours later, it’s difficult to predict where the American political curve might lead. But simple economic logic suggests that the United States is unlikely to impose severe financial sanctions on China. Each time the US uses the dollar as a political club, its share in international payments is reduced. A few years ago, the dollar accounted for more than half of international payments, while today it’s only about 40%.
Of course, it is quite reasonable for other countries to take measures to diversify their reserves and a basket of currencies in which trade is conducted. For example, the Russian Central Bank is building up reserves in yuans: their share is already exceeding 12%. Russia is gradually reducing the share of the dollar in transactions with its partners, including China. Last year, the share of the dollar in Russia’s transactions with the BRICS countries decreased from 73% to 49%.
However, the dollar’s place in Russian trade is still occupied by the euro, and not national currencies. This is due to objective economic reasons. No other currency can yet be fully considered international. Although the yuan was included in the SDR basket in 2016, its share in international trade is still not more than 2%.
Abandoning the dollar as a global currency is hardly possible in the near future. Unless the US itself, with its unpredictable actions in politics and economy, forces other countries to sharply accelerate the development of a new global financial system and the search for an alternative to the dollar.