By Samuel Shen, Winni Zhou and Kevin Yao
SHANGHAI / BEIJING (Reuters) – A sharp escalation of tensions with the United States has raised fears in China of a deepening financial war that could result in the closure of the world dollar system – a devastating prospect once considered far-fetched but now impossible .
Chinese officials and economists have been unusually public in recent months in talks about scenarios in worst cases where China is blocked from dollar settlements, when Washington frees or confiscates part of China’s major US debt.
These concerns have galvanized some in Beijing to call for improvements in the yuan’s global clout, as it appears to be reducing confidence in the greenback.
Some economists even dream of the idea of regulating the export of China-made COVID-19 faxes in yuan, and seek to bypass dollar regulation with a digital version of the currency.
“Yuan internationalization was a good thing to have. It is now becoming a must-have,” said Shuang Ding, head of economic research at Greater China at Standard Chartered and a former economist at the People’s Bank of China (PBOC).
The threat of Sino-American financial “decoupling” is becoming “clear and present,” Ding said.
Although a complete separation of the world’s two largest economies is unlikely, the Trump administration has called for a partial decoupling in key areas related to trade, technology and financial activity.
Washington has created a barrage of actions punishing China, including proposals for U.S. listing of Chinese companies that do not comply with U.S. accounting standards and ties to Chinese-owned TikTok and WeChat apps. Further tension is expected in the run-up to US elections on Nov. 3.
“A broad financial war has already begun … the most fatal tactics have yet to be used,” Yu Yongding, an economist at the state-sponsored Chinese Academy of Social Sciences (CASS) who previously advised the PBOC, told Reuters.
Yu said the eventual sanction would involve U.S. seizures of China’s U.S. assets – Beijing holds more than $ 1 trillion yuan in U.S. government debt – that would be difficult to implement and a self-inflicted win for Washington.
But US leaders called “extremists”, Yu said that a decoupling is not impossible, so China must make preparations.
HIGH COMMITMENT
The stakes are high. Any move by Washington to cut China off from the dollar system as revenge by Beijing for selling off a large chunk of U.S. debt could ruin financial markets and shake the world economy, analysts said.
Fang Xinghai, a senior securities regulator, said China was vulnerable to US sanctions and needed to make “early” and “real” preparations. “Such things have already happened to many Russian companies and financial institutions,” Fang told a June forum organized by Chinese media outlet Caixin.
Guan Tao, former director of the International Payments Division of the State Administration of Foreign Exchange of China and now chief global economist at BOC International (China), also said that Beijing should prepare itself for decoupling.
“We need to mentally prepare that the United States can expel China from the dollar regulation system,” he told Reuters.
In a report co-authored last month, Guan called for increased use of Yuan’s cross-border interbank payment system in global trade. Most of the limits on transactions in China are settled in dollars through the SWIFT system, which some say makes it vulnerable.
RENEWED PUSH
After a five-year hiatus, Beijing is reopening its pressure to globalize the yuan.
The Shanghai headquarters of PBOC last month threatened to advise financial institutions to expand yuan trade and prioritize local use of money in direct investment.
Central Bank chief Yi Gang said in comments released on Sunday that yuan internationalization is progressing well, with borderline declines growing 36.7% in the first half of 2020 from a year earlier.
Internationalization is still hampered by China’s own stricter capital controls. It could also meet resistance from countries that have criticized China over issues ranging from the coronavirus to its release in Hong Kong.
The yuan’s share of global foreign exchange reserves exceeded 2% in the first quarter, Yi said. It also hit the Swiss franc in June, the fifth most used currency for international payments, with a share of 1.76%, according to SWIFT.
One way to push the boundaries of settlement would be to price some exports in renminbi, such as a possible vaccine against coronavirus, suggested Tommy Xie, head of research for Greater China at OCBC Bank in Singapore.
Another is to use a proposed digital yuan in cross-border transactions on the back of currency swaps between central banks, surrounding systems such as SWIFT, said Ding Jianping, professor of finance at Shanghai University of Finance and Economics.
China has rapid plans to develop a sovereign digital currency, while the PBOC has been busy signing currency swaps with foreign counterparts.
Shuang Ding of Standard Chartered said Beijing had no choice but to prepare for Washington’s “nuclear option” to get China out of the dollar system.
“Beijing cannot afford to be disgusted when sanctions actually come against China,” he said.
(Report by Kevin Yao in Beijing; Winni Zhou and Samuel Shen in Shanghai; Edited by Tony Munroe and Sam Holmes)
