He Xiaobei (何晓贝) is at Peking University’s National School of Development: the deputy director of the Macro and Green Finance Lab. She offers this assessment on the financial security aspect as an important part of China’s national security:
“China's 20th Party Congress Report placed ‘national security’ in a very important position. This is closely related to the complex international political environment that China is currently facing. Sino-US relations have deteriorated in recent years. The US has frequently imposed export controls on China on national security grounds, jeopardising the security of China's supply chains. For example, [the US’s] constantly increasing chip export controls are a serious threat to the development of China's AI and supercomputing industries.”
“In addition to industrial security, financial security is also an important constituent of national security and an essential building block for economic development. If geopolitical threats were to intensify, our financial security would also be at great risk.”
“In the face of the US's potential weaponisation of the dollar and its financial system, China needs to use bottom-line thinking [底线思维 = ‘a thinking skill in which the thinker carefully weighs up the risks and anticipates the worst-case scenario’] when making preparations to safeguard its financial security and defend itself against a variety of risks. Since the [outbreak of the] Russo-Ukrainian conflict, the all-round escalation of financial sanctions against Russia by a US-led coalition of 38 countries provides important lessons for China.”
2. The potential impact of financial sanctions on China:
“The economic impact of financial sanctions (combined with trade sanctions) on a country subject to sanctions is huge. As a result of Russia's importance in the EU's energy supply, Western countries have in fact provided Russia with considerable leeway in the current round of financial sanctions (especially the SWIFT sanctions) in order to avoid the consequences of a [full blown] energy crisis themselves.”
“In the wake of the sanctions, Russia issued a ‘ruble settlement decree’, which requires companies from non-Russia-friendly countries to open ruble accounts in Russian banks and pay for their purchases of Russian gas in rubles. This strategy has been effective in easing Russia's balance-of-payments crisis due to the heavy dependence of EU countries on Russian gas imports.”
“However, China is not in a position to implement a similar response.”
“China does not have [Russia’s] unique characteristics. If, therefore, the US and its allies were to impose sanctions on China, the Chinese financial system could be fully decoupled from the international financial system.”
“If the US were to sanction the People's Bank of China, the US Treasuries and a significant portion of other US dollar-denominated assets in our foreign exchange reserves would be frozen and would not be able to be traded. If the EU, Japan, Switzerland and other countries were to join the US in imposing sanctions [on China], all of our foreign exchange reserves would be frozen and our ability to make external payments would then be seriously impaired: with businesses and citizens not being able to exchange foreign currencies, not being able to import most products and services, and with [Chinese] entities possibly defaulting on their foreign debts. The renminbi would also be under considerable depreciative pressure.”
“In the event that the US and its allies were to impose SWIFT sanctions on China, it is entirely possible that Chinese financial institutions would be targeted more comprehensively [than Russian ones], as was the case with Iran. Should this ever happen, not only would foreign currency operations (whether cross-border or domestic) be impossible, but some cross-border RMB payments and receipts would also be disrupted. This is because China's RMB cross-border interbank payment system, CIPS, also uses the SWIFT messaging function. If this were to happen, the impact on China's economy and financial sector would be even more severe than that on Russia’s, and could be similar to that suffered by Iran’s … whose GDP shrank by 20% between 2011-2016 (in local currency terms; 36% in US dollar terms), unemployment rose to 20% and inflation at one point reached 60% as a result of Western financial and trade sanctions.”
3. The impact of financial sanctions on the international monetary system (and on China’s future strategy):
“As a result of the financial sanctions imposed by the US for over a decade, a number of countries have begun to examine and adjust their financial layouts, thereby affecting to some extent the current structure of the international monetary system. These new trends offer us important insights [which will be useful] when formulating China’s medium to long-term response strategy.”
“The first is the establishment of a new cross-border payment system … According to reports, both India and China are interested in linking up with SPFS [Russia’s alternative to SWIFT] with China considering linking its RMB cross-border payment system CIPS with SPFS.”
“The second is the growing emphasis on the use of local currencies for the settlement of cross-border trade, particularly of bulk commodities such as energy.”
“The third is the diversification of reserve assets.”
4. Looking to the future:
“First, … If the US and its allies were to remove Chinese banks from SWIFT and ban Chinese entities from using the US dollar and the cross-border USD clearing system CHIPS, some cross-border RMB transactions could theoretically still be carried out through CIPS, but the volume of payments cleared would be very limited.”
“Second, although the traditional cross-border payment system relies on the financial architecture [largely] controlled by the US and Europe, the development of digital currencies, especially the central bank digital currencies, will play a major role in the future transformation of the cross-border payment system. China should be an active participant in the development of a global cross-border digital currency payment system and in international standard setting. China has already taken the lead in issuing its digital renminbi but developed countries (led by the G7) are currently leading the international standard-setting and [the construction of] a global governance framework for central bank digital currencies … As Eichengreen (2022) points out, cross-border payments using central bank digital currencies need to be built on a linkable and interoperable platform. But how can China and the US agree on a way of governance once these foundations have been laid? Such issues need to be addressed effectively, otherwise they will affect China’s financial security in the long run.”
“Finally, advancing the internationalisation of the RMB is the basis for safeguarding our financial and economic security. Irrespective of whether it is the traditional or a new payment system that is used, it is the expansion of the RMB's international use that is key to limiting the impact of financial sanctions … In fact, the internationalisation of the RMB is faced with a bottleneck due to its incomplete convertibility and lack of the ingredients necessary for it to serve as an international reserve currency. Although China has gradually eased restrictions on cross-border capital flows, increased the flexibility of the RMB’s exchange rate and further opened up China's bond market, there is still an urgent need for some fundamental reforms in order to increase the incentives and confidence of foreign investors [seeking] to hold RMB. This would help further promote the development of the RMB’s internationalisation and strengthen the resilience of China's financial system in the face of external risks.”