China's Technical Measures Unlikely to be Effective in Reducing Reliance on SWIFT
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.
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.
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
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.
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:
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.
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.
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.
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.
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.
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.
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.
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