As trade and political tensions escalate between China and the US, there are increasing calls in China to reduce dependence on the dollar.
Washington is threatening to impose secondary sanctions on Chinese financial institutions servicing people on the US sanctions list and considering de-listing Chinese companies from US exchanges.
Meanwhile, China has been providing for the growth in demand for the American currency for many years, and financial wars are now disadvantageous to any country.
Foreign governments sold $500 billion worth of US government bonds in the second quarter of 2020, with China dropping a third of all securities.
Since its accession to the WTO, China has pushed up the demand for the dollar and thus reduced the cost of borrowing for the United States. At the moment, China remains the largest holder of US Treasury securities – more than $1 trillion.
However, we should not forget that as China abandons dollar financial instruments, demand for US currency will fall, and it will become more and more difficult for the USA to finance its huge budget deficit.
Some Chinese officials in recent weeks have started talking about the need to get rid of dollar dependence as soon as possible and to promote the internationalization of the yuan.
First, Fang Xinghai, Vice-Chairman of China Securities Regulatory Commission, warned of the danger of China’s disconnection from the dollar system and SWIFT international payment network in case of the escalation of tensions between China and the US regime.
The reason for these concerns was the latest actions by the USA. The US Senate approved sanctions for the alleged oppression of Uighurs in Xinjiang as well as for China’s adoption of the Hong Kong National Security Law.
American senators have long called for sanctions against Chinese officials under the Magnitsky Act. But Trump has so far been in no hurry to implement these initiatives because he feared that trade negotiations between the two countries would then come to nought.
However, under the current circumstances of the election race, with the US economy going into a tailspin because of the Corona-virus epidemic, the candidates from the two parties seem to have come up with nothing better than to play the Chinese threat card.
Addressing the pressing socio-economic problems in the country in such a short period is hardly possible, so the easiest way is to switch the degree of tension from internal problems to external threats.
This explains the constant US calls to hold China accountable for the global pandemic, calls for new, restrictive listing rules for Chinese companies, and even secondary sanctions for banks and financial institutions that serve individuals allegedly involved in human rights infringements in Xinjiang and the Hong Kong National Security Law.
Sanctions against Chinese financial structures may indeed be painful. The share of the yuan in China’s international settlements in 2019 was just over 19%.
The dollar and the euro still account for the majority of trade, Chen Fengying, Director of the Institute of World Economics of the China Institute of Contemporary International Relations, told Sputnik.
In the short term, dollar sanctions against China may hurt the US itself. According to the WTO, 13% of world exports and 11% of world imports – the largest shares in world trade – are accounted for by China.
If the dollar is excluded from the settlements of such volume of transactions, it can create shocks within the US financial system.
At the same time, Russia’s experience shows that in case of the introduction of restrictions on access to the American financial system, it is relatively easy to switch to euro settlements.
As a result, the US simply seeks to reduce the share of its own currency in international settlements. Just a few years ago the dollar accounted for more than half of international settlements, and now it only stands at about 40%.
At the same time, due to the status of the dollar as the world’s main currency, the United States allowed itself to exist for many decades to have a huge budget deficit, which was financed, in fact, by other countries.
If other currencies were traded, countries would have already switched to making settlements in them. But, unfortunately, there is no possible alternative yet. “This is a real problem of the world economy.
Judging by market sentiment, American business is not ready for a confrontation with China, and even on the contrary, it aspires to the Chinese market amid worsening political relations between the two countries.
Last year, PayPal became the first foreign company servicing electronic payment services in China. JP Morgan has received permission to transfer its business in China completely under its control.
American Express became the first foreign company to obtain permission to conduct a credit card business in China. And the world rating agencies S&P Global and Fitch enthusiastically took up the Chinese credit rating market.
Sputnik / ABC Flash Point News 2020.