SHANGHAI / BEIJING (Reuters) – A sharp escalation in tensions with the United States has sparked fears in China about a deepening financial war that could lead to its disqualification the global dollar system – a dire prospect that was once considered remote but not impossible now.
FILE PHOTO: Chinese Yuan and US Dollar are seen behind an illuminated stock chart in this illustration taken on February 10, 2020. REUTERS / Dado Ruvic / Illustration
Chinese officials and economists have been unusually open in recent months discussing worst-case scenarios in which China is blocked from settlements in dollars, or Washington freezes or confiscates part of China’s huge debt in America.
Those concerns have prompted some in Beijing to revive calls to bolster the yuan’s global influence as it appears to ease reliance on the greenback.
Some economists have even floated the idea of tackling the export of China-made COVID-19 vaccine in yuan and are looking to bypass the dollar payment with one version. digital currency.
“The internationalization of the yuan is a good thing. Shuang Ding, head of China economic research at Standard Chartered and a former economist at the People’s Bank of China (PBOC), said.
The threat of Sino-US financial “disintegration” is becoming “clear and present,” Ding said.
While a complete separation of the world’s two largest economies is unlikely, the Trump administration is still pushing for partial decoupling in key areas related to trade, technology and operations. financial action.
Washington has launched a series of Chinese sanctions actions, including proposing to ban the US listing of Chinese companies that do not meet US accounting standards and ban Chinese-owned TikTok and WeChat apps. . More tension is expected in the upcoming US election on November 3.
Yu Yongding, an economist at the state-backed Chinese Academy of Social Sciences (CASS), who previously advised the PBOC, told Reuters: “A massive financial war has begun … The deadliest tactics have yet to be used.
Yu said the final sanctions would involve the US seizure of Chinese assets in the US – Beijing holds more than $ 1 trillion in US government debt – would be difficult and self-inflicted. for Washington.
But calling the US leaders “extremists”, Yu said that separation is not impossible, so China should be prepared.
The stakes are very high. Any move by Washington to cut China off the dollar system or Beijing’s retaliation for the sale of large amounts of US debt could shake financial markets and hurt, analysts said. harmful to the global economy.
Fang Xinghai, a senior securities manager, said China is vulnerable to US sanctions and should prepare “soon” and “really”. “Such things have happened to many Russian businesses and financial institutions,” Fang said in a June forum hosted by Chinese media outlet Caixin.
Guan Tao, former director of the international payments division of China’s State Foreign Exchange Administration and now head of global economics at BOC International (China), also said that Beijing should be ready for a split. White.
“We must be prepared that the United States can expel China from the dollar payment system,” he told Reuters.
In a report co-authored by him last month, Guan called for an increased use of China’s renminbi payment system, the Cross-Border Interbank Payment System, in global trade. . Most of China’s cross-border transactions are paid for in dollars through the SWIFT system, some say it’s vulnerable.
THE CARD IS RENEWED
After five years of lull, Beijing is reviving its efforts to globalize the yuan.
PBOC’s Shanghai headquarters last month urged financial institutions to expand yuan-denominated trade and to prioritize the use of local currency in direct investment.
Central bank chief Yi Gang said in a statement released Sunday that the renminbi internationalization is going well, with cross-border settlements up 36.7% in first half of 2020 compared to a year earlier.
However, the internationalization process is hampered by China’s own stringent capital controls. It could also face resistance from countries that have criticized China on issues ranging from the coronavirus to their repression with Hong Kong.
Yi said the yuan’s share of global foreign exchange reserves surpassed 2% in the first quarter. It also beat the Swiss franc in June to become the fifth most used currency in international payments, with a weight of 1.76%, according to SWIFT.
Tommy Xie, head of China studies at OCBC Bank in Singapore, suggests one way to speed up cross-border payments is by pricing some exports in yuan, such as vaccines. -xin coronavirus.
Another method is to use the proposed digital yuan in cross-border transactions based on currency swaps between central banks, bypassing systems like SWIFT, Ding Jianping, professor finance at Shanghai University of Finance and Economics said.
China has been quick to follow up plans to develop a sovereign digital currency, while the PBOC is busy signing currency swap deals with foreign partners.
Standard Chartered’s Shuang Ding said Beijing had no choice but to prepare for Washington’s “nuclear option” to remove China from the dollar system.
“Beijing cannot fall into turmoil when the sanctions do hit China,” he said.
The report by Kevin Yao in Beijing; Winni Zhou and Samuel Shen in Shanghai; Edited by Tony Munroe and Sam Holmes