By Samuel Shen, Winni Zhou and Kevin Yao
SHANGHAI / BEJING (Reuters) – A sharp escalation of tensions with the United States has raised fears in China of a deepening financial war that could result in its closure by the global dollar system – a devastating prospect once considered distant. but now not impossible
Chinese officials and economists in recent months have been extremely public in discussing worst-case scenarios, under which China is blocked by dollar deals, or Washington freezes or seizes part of China’s large debt holdings in the US.
These concerns have galvanized some in Beijing to revive calls to strengthen the global influence of the yuan as they appear to reduce confidence in the green return.
Some economists even navigate the idea of resolving exports of Chinese-made COVID-19 vaccines to the yuan, and are seeking to bypass the dollar settlement with a digital version of the currency.
“The internationalization of the Yuan was a good thing. It is now becoming necessary,” said Shuang Ding, head of Greater China’s economic study at Standard Chartered and a former economist at the People’s Bank of China (PBOC).
The threat of Sino-US financial “disengagement” is becoming “clear and present,” Ding said.
Although a complete split of the world’s two largest economies is unlikely, the Trump administration has pushed for a partial break in key areas related to trade, technology and financial activity.
Washington has issued a series of actions penalizing China, including proposals to ban US lists of Chinese companies that do not meet US accounting standards and bans on Chinese-owned TikTok and WeChat applications. Further tension is expected in the November 3 US election.
“A large-scale financial war has already begun … the deadliest tactics have not yet been used,” Yu Yongding, an economist at the state-backed Chinese Academy of Social Sciences (CASS), who previously advised the PBOC, told Reuters.
Yu said the final sanction would include the seizure of China’s US assets – Beijing holds over $ 1 trillion in US government debt – which would be difficult to enforce and a self-inflicted wound on Washington. .
But calling American leaders “extremists,” Yu said a break-up is not impossible, so China needs to make preparations.
Shares are high. Any move by Washington to cut China off from the dollar system or retaliate by Beijing to sell off a large portion of U.S. debt could ruin financial markets and hurt the global economy, analysts said.
Fang Xinghai, a senior regulator of securities, said China is sensitive to US sanctions and needs to make “early” and “real” preparations. “Such things have already happened to many Russian businesses and financial institutions,” Fang told a June forum hosted by Chinese media Caixin.
Guan Tao, former director of the international payments department of China State Foreign Exchange Administration and now chief economist at BOC International (China), also said Beijing should prepare itself for secession.
“We have to mentally prepare for the United States to oust China from the dollar repayment system,” he told Reuters.
In a report he co-authored last month, Guan called for increased use of China’s yuan repayment system, the Cross-Border Interbank System, in global trade. Most of China’s cross-border transactions are settled in dollars through the SWIFT system, which some say leaves it vulnerable.
POWER RE RENATED
After a five-year lull, Beijing is reviving its push to globalize the yuan.
The PBOC headquarters in Shanghai last month called on financial institutions to expand the yuan’s trade and prioritize the use of local currency in direct investment.
Central Bank chief Yi Gang said in remarks released Sunday that the yuan’s internationalization is going well, with cross-border settlements growing 36.7% in the first half of 2020 from a year earlier.
However, internationalization has been hampered by China’s own strict capital controls. It may also face resistance from countries that have criticized China on issues ranging from the coronavirus to its strait in Hong Kong.
The yuan share in global foreign exchange reserves exceeded 2% in the first quarter, Yi said. It also beat the Swiss franc in June to be the fifth most used currency for international payments, with a share of 1.76%, according to SWIFT.
One way to speed up the cross-border settlement would be to price some exports in renminbi, such as a possible coronavirus vaccine, suggested Tommy Xie, head of Greater China research at OCBC Bank in Singapore.
Another is to use a proposed digital yuan in cross-border transactions at the back of currency exchanges between central banks, bypassing systems such as SWIFT, said Ding Jianping, a professor of finance at Shanghai University of Finance and Economics.
China has pursued swift 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 remove China from the dollar system.
“Beijing cannot allow itself to be thrown into disarray when sanctions actually fall on China,” he said.
(Reporting by Kevin Yao in Beijing; Winni Zhou and Samuel Shen in Shanghai; Editing by Tony Munroe and Sam Holmes)