Since the failure of the Alaska talks, the Chinese communist state has been subjected to a series of sanctions by the US EU Canada and the UK, and the CCP has fought back, as exemplified by the Xinjiang cotton incident. But it is also clear that the Chinese Communist Party is feeling tremendous international pressure, so it is pulling people everywhere to strengthen its courage. The first was to invite the Russian foreign minister to talks in Guilin, where a joint statement was issued and China paid the price by buying a lot of high-priced Russian coal.
Before his visit to China, Russian Foreign Minister Sergei Lavrov called on China and Russia to reduce their dependence on the dollar and the Western-controlled international payment system to reduce the risk of being sanctioned by the West. This was also signaled by the Russian and Chinese foreign ministers during their talks, when both sides agreed to use more and more local currency settlements in the middle of Russian-Chinese trade and to de-dollarize. The Russian foreign minister also praised China for beating the West in monetary and financial terms and other Western turf. Of course this is obvious bragging, but one can see that China and Russia are trying to de-dollarize, or at least cut the influence of the dollar, because they are constrained by it.
Recently, the U.S. and its Western allies have joined forces to counter the Russian and Chinese threat, forcing China and Russia to jointly accelerate the pace of decoupling from the dollar and establishing an alternative to the Western payment system.
In 2019, Putin told a meeting of BRICS leaders on the sidelines of the G20 summit that integrating the payment systems of the five countries and establishing independent information exchange channels could improve the security of BRICS financial operations and strengthen the banking system’s resilience to external influences. Russian Ambassador to China Denisov estimated last December that the share of local currency settlement of Russian-Chinese trade would reach 25 percent by 2020. He said both Russia and China have had to look for settlement currencies other than the U.S. dollar because “in today’s world, the dollar is not a simple financial instrument and has essentially become a political lever for the United States.
Both Russia and China have sharply reduced the dollar share of their foreign exchange reserves in the past two years, increasing the euro share and also increasing their gold reserves. “Russia has cut the dollar share of its international reserves to about 20 percent, which is now lower than the euro and gold.” China holds more U.S. Treasuries, though it has released signals that it wants to reduce that portion of its reserves. It did reduce its holdings of U.S. Treasuries quite a bit over the past two years, but it has still increased its holdings in recent months, and probably does not have too many good investment targets.
In February 2021, the RMB maintained its global payment ranking of fifth in the world in the ranking of global payment currencies based on amount statistics, with a global payment share of only 2.2%. In the ranking of major currencies in terms of payment value, the U.S. dollar, the euro, the British pound and the Japanese yen ranked in the top four with 38.43%, 37.13%, 6.57% and 3.18%, respectively. in the third quarter of 2020, about 56% of global central bank reserves were held in the form of the U.S. dollar, which remains the global reserve currency of choice, with the yuan accounting for only 2%.
In an effort to challenge the U.S. dollar payment system, the Chinese Communist government has also been encouraging the use of its self-developed alternative to SWIFT for cross-border payments solutions.
In October 2015, the Chinese central bank launched the RMB Cross-Border Payment System (CIPS). A number of Russian banks have joined CIPS, and Sino-Russian gas, oil, and gold transactions could theoretically be settled in RMB. 2019, the system processes RMB 135.7 billion ($19.4 billion) per day. However, most of China’s cross-border transactions are still settled in U.S. dollars through the SWIFT system.
Similar to China, Russia has set up its own banking information system as an alternative to SWIFT. Russia also said in February that it would include the yuan and the yen in its national wealth fund.
Nonetheless, this is only a move by Russia and China to accept the currency of the other country, increase their holdings of each other’s sovereign bonds and use the yuan in trade between the two countries, and this presupposes mutual trust. Such cooperation is unsustainable once suspicion arises.
In addition to emboldening Russia, Iran, the world’s leading oil producer, is also in the mix. After all, once the U.S. and its allies turn on each other, energy security is the first issue to be considered. Chinese Foreign Minister Wang Yi signed a 25-year comprehensive cooperation agreement with Iranian Foreign Minister in Tehran on March 27, which includes “political, strategic and economic” components. The agreement is focused on China’s investment of $400 billion in Iran over 25 years, with large-scale investments in dozens of areas such as banking, telecommunications, ports, railroads, health care and information technology to break the U.S. embargo and sanctions. In exchange, China will receive regular and heavily discounted supplies of Iranian oil, also breaking the U.S.-dominated blockade of China in the world energy landscape. The cooperation agreement also includes conducting joint training and exercises, joint research and weapons development, and intelligence sharing.
Oil settlements and trade transactions between China and Iran will be settled using the Chinese renminbi and China’s newly launched digital renminbi, bypassing dollar settlements; an important step in financial de-dollarization. Iranian missiles will be guided by China’s Beidou global positioning navigation system. So overall, whether it is China and Russia strengthening their trade and foreign exchange reserves to de-dollarize, or whether it is Iran having a RMB settlement on transactions, it can be said that China is trying to form an alliance with these US sanctioned results to break through the US dollar’s monopoly on the financial landscape. Essentially it is an attempt to break through the U.S. financial threat to China. But is this Chinese vision likely to come to fruition? Will China be subject to retaliatory sanctions from the United States for such behavior?
China’s current use of the yuan for goods trade settlement with Russia and Iran are all forced together because all three countries have been suppressed and sanctioned by the United States. Without fundamental common interests between the three parties, such an alliance will not last long, especially Russia, which has always been the heart of China and its biggest threat. The reason why they are still sitting together with China is only because it is profitable. Once China has a problem, the most vicious stab to China is the polar bear. Secondly, the trade of these three countries is mainly concentrated in the energy sector, and the overall volume of trade in the world accounts for a very small percentage, even if all of them go to the dollar and use the yuan, it will not have much effect on the internationalization of the yuan, much less threaten the status of the petrodollar. Finally, Russia and Iran are willing to accept the RMB, ultimately because of China’s $3 trillion in foreign exchange reserves, and without and this as a margin, Russia and Iran would not be foolish enough to accept the world’s most heavily over-issued currency.
Well, when it comes to U.S. sanctions and counterattacks, there is actually an option that can almost slowly be put on the table, and that is to kick China and Hong Kong out of the SWIFT system.
All along, China has been trying to deconstruct the political and economic order led by the United States, replacing GPS with Beidou satellites, breaking the duopoly of Boeing and Airbus with the C919, replacing Silicon Valley with Shenzhen and Shanghai, New York …… Only in the currency cross-border payment clearing system, the infrastructure of the financial sector, China’s autonomy is still Inch by inch, it is extremely dependent on SWIFT.
Because this system connects more than 11,000 banks, securities institutions and corporate clients around the world, it is the connector of the settlement system between countries, and it supports payments in almost all currencies, including the yuan, euro, Japanese, Hong Kong dollar, etc. SWIFT is the key to the global trading system being able to function properly.
The consequences of kicking a region out of SWIFT are equivalent to locking someone’s doors and directly cutting off its imports and exports. Such is the case with Iran.In 2018, the U.S. cut off financial institutions, including the Central Bank of Iran, from the SWIFT system, pushing the oil powerhouse into a financial silo. Iran’s trade settlements instantly regressed back to their primitive levels of more than a hundred years ago. Its oil exports have evaporated off a cliff, sliding from 2.6 million barrels per day to about 200,000 barrels per day today, the lowest in decades.
In the old days, there was only one way to cut off a country’s imports and exports – by using naval power to blockade someone’s coastline. But the U.S. is different. Because of the dollar’s hegemony, the U.S. has an extremely asymmetrical power. As soon as it kicks someone out of the SWIFT system, the sanctioned party is tantamount to self-isolating from the world.
If the U.S. really dares to kick China out of SWIFT, it would be an even more devastating blow. On the import side, China imports more than 100 million tons of grain a year, and there is still a 5% shortfall in the autonomous rate of grains; it also imports about 500 million tons of oil a year to meet 70% of its domestic demand for oil and to keep its industrial system running normally. In terms of exports, China’s export trade is up to 17 trillion yuan a year, and the export industry drives the employment of 180 million people. If we calculate an average of 3 people per household, the livelihood of nearly 600 million people is related to exports.
According to such a large population in China, once isolated from world trade, the social order will collapse at a rate that is unimaginable. China’s economic development level, I am afraid, will go straight back to 20 years ago. Think about North Korea’s “self-sufficiency”, the rusty economy with a lot of holes, the picture is too beautiful. Therefore, China kicked out of SWIFT, is undoubtedly a “declaration of war” on China.
Of course, as the world’s second largest economy, the possibility of being kicked out at once is really unlikely. But the biggest possibility is that the U.S. will launch sanctions against a few specific financial institutions, or freeze and confiscate the property of certain key people, and restrict Chinese companies from entering the U.S. securities market financing. Even so, the lethality of such a move cannot be ignored. For example, the recent plunge and expected delisting of Chinese stocks is a good example.
In the past two years, there have been people blowing “great my country”. Once there is a conflict, the Internet will be a shouting and shouting. The recent boycott of HM and Nike is a good example. However, these war wolves just need to use their brains a little bit to know, from the cut off SWIFT thing to see, you know China’s strength to fully catch up with the United States, there are still many gaps to fill.
First of all, in the eyes of the other side, China’s financial transactions are basically running around naked, not wearing a single piece of clothing. To give you a science, although SWIFT’s headquarters is located in Belgium, but in Amsterdam, the Netherlands, the United States, New York, Switzerland have set up exchange centers, each center interconnection, real-time sharing of all information. Control of the New York center, in theory, there is a back door to information. As long as the old U.S. is willing, it will be able to monitor all the transaction data using SWIFT as a channel. Every transaction in China, in fact, is under the eyes of the old U.S. More than 10,000 banks around the world have no secrets.
Therefore, whether from the perspective of economic security or information security, China is in a very passive position. In October 2015, China launched the Cross Border Payment System (CIPS), which provides clearing services for cross-border and offshore business of domestic and foreign financial institutions in RMB. The CIPS system is a clearing service for the cross-border and offshore operations of domestic and foreign financial institutions. Today, the system has 31 direct participants and more than 800 indirect participants, covering more than 160 countries and regions around the world. The numbers look okay, but compared to SWIF, it’s clearly still a long way off: in 2018, China’s CIPS processed 1.44 million transactions of all kinds, amounting to about $3.9 trillion. Note, here is the total amount over the course of a year. By comparison, SWIFT transmits an average of 31.31 million messages per day, with an average daily amount of $5.4 trillion.CIPS is just a bridge, and the key to a large flow depends on the degree of internationalization of the RMB, which is actually regressing in the past few years, accounting for 2.2% of the world’s currency settlements and more than 50% of the US dollar, which just can’t be compared. China’s move to pull Russia and Iran together to form an axis group to confront the US financially and to de-dollarize is a pipe dream, so to speak.
The funny thing is that recently the official “famous” scholars of the Chinese Communist Party are helping to wave the flag and advocate the de-dollarization. The other day, the official drummer Ren Zeping posted an article claiming that “the dollar is shearing wool around the world again, suggesting to reduce dollar assets and resist dollar hegemony”, which drew a lot of attention from domestic parties. He said, “To prevent the U.S. from shearing wool through currency deflation and dollar devaluation, we suggest that we should sell U.S. debt, reduce our holdings of dollar assets and buy gold, oil, natural gas, iron ore, land leases, agricultural products and stocks of high-tech companies on a large scale around the world in the future. The size of China’s foreign debt is very low and there is no need to reserve $3 trillion in foreign reserves.”
This kind of speech can be put on diplomatic shouting slogans and making a gesture, but put into the actual operation level, it is a complete snub. Although the dollar is currently in a rapid expansion phase, relative to gold, oil, agricultural products and other commodities in the value of the decline, but to say that because of this to reduce the dollar assets seems impure motive. After all, the expansion and contraction of the dollar is cyclical, and the current dollar has begun to enter the eve of contraction, as can be seen from the strength of U.S. bond yields and the dollar index. The dumping of dollar assets at this time is probably still mainly in line with the Chinese Communist government’s grand strategy of de-dollarization, waving the flag for the government’s acquisition of dollars and coaxing people to hand over their dollars. Other than that, it is not clear how informative and instructive his speech is.
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