As U.S.-China relations continue to deteriorate, U.S. politicians and senior government officials have signaled more than once that they intend to impose financial sanctions on China. Among the various risk considerations, how China can get rid of the influence of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system is a key issue. A former official of the People's Bank of China (PBOC) recently stressed at forum in China that the construction of cross-border payment infrastructure should be strengthened, the construction of the RMB cross-border interbank payment system (CIPS) should be actively promoted, the efficiency of RMB clearing and settlement should be improved, the dependence of Chinese financial institutions on SWIFT should be gradually reduced, and the ability of financial support for Chinese enterprises to participate in the international economic circulation should be maintained.
Zhang Xiaohui, a former official of the PBOC and dean of Wudaokou School of Finance, said that the importance of promoting the international use of the RMB, or the Chinese yuan, is growing in the current situation, and the non-market factors of cross-border currency selection are becoming more and more important amid the changing international political and economic pattern, especially at a time when geopolitical risks are rising, unilateralism and trade protectionism are prevalent, and economic and trade issues are politicized. Issues that used to be considered as trivial due to transaction inertia and path dependence are gradually becoming important. In the past, the choice of enterprises' cross-border settlement currency was mainly based on market factors, such as exchange rate risk, currency exchange cost, and financing cost. Since RMB is a high-interest currency, it is more attractive to foreign investors in the financial market, but it does not have a cost advantage over USD, EUR, and JPY in trade activities. However, due to the impact of the U.S. financial sanctions and the long-arm jurisdiction, more and more enterprises have started to choose RMB as the currency for cross-border settlement, fearing that the channels of clearing and settlement in USD are blocked.
It should be emphasized that if the United States were to impose comprehensive financial sanctions on China, such an extreme scenario would be tantamount to a "nuclear war" in the economic and financial fields. Due to the huge size of China's economy and its strong linkage with the global economy and trade, if the United States imposes extensive financial sanctions on China, it will cause great turmoil in the global economy and financial markets and deal a great blow to China's economy and financial markets.
On the one hand, China's economy, foreign trade, the RMB exchange rate, financial markets, overseas financial assets, achievements in "going out" over the years (foreign investment and business), international cooperation under the "Belt and Road Initiative", and its economic and financial interests in many fields will take a major hit. On the other hand, the U.S. economy, financial markets, and the interests of U.S. companies in China would also be severely impacted. In addition, an economic and financial "nuclear war" between the world's two largest economies would have global repercussions, and the economic and financial markets of other countries would also be severely affected.
While such "nuclear war-level" financial sanctions are less likely to occur, there is virtually no effective way to deal with them if they do. Therefore, the measures now being discussed to deal with the so-called financial sanctions of the United States are precautionary measures in the context of a "low-intensity" conflict scenario.
Some researchers have summarized the measures taken in response to the financial sanctions from Russia's "countermeasures" against the U.S. financial sanctions, which can be summarized as follows:
First, Russia has strengthened its cooperation with China. After being sanctioned by the United States, Russia has received strong support from China on many fronts. For example, in the third quarter of 2015, Rosneft Oil Company received USD 15 billion in oil advances from China, the largest amount of foreign funds received by Russia since it was sanctioned, greatly improving the deteriorating financial situation of its state-owned energy enterprise under sanctions. However, the situation could be very different when China is subject to U.S. financial sanctions. An important prerequisite for this measure is that a country or a group of countries is willing to cooperate with China. It will be dangerous if the Western world is unwilling to offend the United States and does not want to cooperate with China.
Second, to build a new financial system and actively de-dollarization. Russia actively began to de-dollarize after being sanctioned by the United States. The dollar's share of Russia's import and export payments has been falling, while Russia's gold reserves have been rising and RMB reserves have been rapidly built up (currently accounted for more than 12%). In 2018, Russia almost "liquidated" its U.S. Treasury holdings, further "breaking" with dollar assets. In 2019, Russia's system for transfer of financial messages (SPFS), which was launched as early as 2014, announced its opening to some foreign banks, while a number of banks were connected to China's CIPS. The dollar's share of Russia's settlement with the BRICS fell from 73% to 49% in the same year. At present, the dollar's position in Russian trade is largely replaced by the euro.
However, researchers at ANBOUND are skeptical that China, which is deeply involved in globalization, can adopt Russian-style de-dollarization. In our opinion, with the depth of China's economic involvement in globalization, it is impossible for China to realize de-dollarization. At best, it can only weaken its dependence on the U.S. dollar. In fact, China is not alone in reducing its dependence on the U.S. dollar. What China should promote in the long run is to promote currency diversification and reduce the share and influence of the dollar in economic activities around the world. It would be a major success if the RMB participated in the establishment of a more influential non-dollar-dominated settlement system and currency markets in the future.
Some Chinese financial experts have given specific suggestions, such as improving the settlement inertia of the dollar-dependent system through sophisticated management. At present, most countries adopt the net settlement of the U.S. dollar, that is, the settlement of the U.S. dollar in the international market is undergoing after Chinese banks are settled among themselves. Most of China's banks adopt the method of net settlement. The head office, branches, or overseas branches of China's banks are undergoing U.S. dollar settlement directly through SWIFT and the Clearing House Interbank Payments System (CHIPS). According to relevant statistics, the average daily settlement volume in China is about two or three hundred billion if it is a full settlement, and only about 1/10 if it is a net settlement. Now the practice is on the one hand to pay more fees, on the other hand, intensify the reliance on the U.S. payment and settlement system. Chinese experts suggest that under the new development pattern of dual circulation, it is necessary for Chinese financial institutions to vigorously promote the net settlement approach.
However, it should be pointed out that the above-mentioned measures in reducing the dependence on SWIFT and CHIPS are mainly technical measures, which can only reduce the use of the above-mentioned systems by specific enterprises to a certain extent, and cannot fundamentally change and get rid of the dependence of Chinese financial institutions on SWIFT.
In our opinion, there are few options and preparations for China to deal with the possible financial sanctions by the U.S. First, China should avoid a comprehensive financial sanction by the United States. The best way to "stop the war" is to "avoid the war". This is actually the best outcome for China. Second, be prepared to deal with partial U.S. financial sanctions against some Chinese financial institutions or, most likely, Hong Kong. It does not rule out the possibility of U.S. sanctions against a portion of Chinese banking institutions (e.g., large state-owned banks), as well as the possibility of U.S. strikes against Hong Kong's status as an international financial center. In the latter case, China would need to bear the inevitable losses. In response, however, what China needs to consider is not a "tit-for-tat" technical countermeasure, but rather the overall interests of China.
Final analysis conclusion:
It will not be easy for Chinese enterprises and financial institutions to significantly reduce their reliance on the SWIFT system (and the U.S. dollar system), and this could be an extremely long process. China may be able to reduce its use of SWIFT partly by optimizing settlement management, but this would not solve the underlying problem. Perhaps the best way is to avoid comprehensive U.S. financial sanctions against China, which is the most advantageous option for China in the short term.
