Financial security has become an integral part of China’s national security strategy since the Asian financial crisis of 1997 – when the so-called Asian Tigers collapsed. Rising geopolitical tensions with the US and the West in general since 2018 and Western economic sanctions against Russia have further prompted Chinese policymakers to strengthen the economy’s financial defenses by reducing the centrality of the dollar in its economy and developing an alternative system for international transactions that would protect it from any “attack” on its financial system.
To this end, the Chinese government has pursued three main strategies.
Strategy 1.
China has supported and promoted regional and multilateral monetary and economic cooperation through regional or otherwise non-Western partnerships. In 2000, he supported the launch of the Chiang Mai Initiative in the wake of the Asian financial crisis and the Bank for International Settlements Regional Liquidity Arrangement in 2022 in response to the economic shocks of the Covid-19 pandemic.
The Chinese government has also worked with it Shanghai Economic Cooperation Organization and the other member countries of the BRICS group (Brazil, Russia, India and South Africa) to promote the use of local currencies in trade, investment and development financing.
Strategy 2.
China has sought to expand the use of the local currency in international trade and investment while promoting international financial infrastructure based on the renminbi. Since the 2008 financial crisis, the Chinese government has allocated resources to develop a yuan-based financial infrastructure.
In 2015, it launched the Shanghai-based Cross-border Interbank Payment System (CIPS) as a critical piece of financial infrastructure to promote the yuan’s internationalization. CIPS allows banks to clear cross-border transactions in the Chinese currency domestically instead of through offshore banks, providing a one-stop alternative to Swift and the New York-based Clearing House’s interbank payment system. CIPS was seen as China’s alternative to its dollar-based financial infrastructure, even before Russian banks were barred from Swift in 2022 due to Western sanctions.
In this respect, CIPS is a financial infrastructure that can allow sanctioned entities to access global markets, although avoiding sanctions was not the motivation for introducing this system.
Strategy 3.
China aims to upgrade the yuan’s role in global commodity pricing, especially in the context of the “clean energy” transition. China has developed many trading platforms for commodities, such as the yuan futures market and commodity exchanges.
China rolled out 2018 yuan oil futures and 2020 copper futures on the Shanghai International Energy Exchange. It also established the Ganzhou Rare Metals Exchange in 2019, in which the Chinese currency is used to set prices for spot trading of tungsten, rare earth products and critical minerals (such as cobalt) necessary for the “clean energy” transition ».
The Petro-Yuan
In the short term, China can capitalize on the energy transition to promote the “petro-yuan”, enjoying the benefits offered by the petrodollar. As the global economy transitions away from fossil fuels, China could also leverage its dominance of critical mineral supply chains and its cooperation with mineral-rich countries such as Russia.
The defense against sanctions
China’s strategies for developing an alternative financial system are defensive rather than offensive – at least for now. The aim is to minimize the negative consequences of comprehensive Western sanctions against China based on extreme geopolitical scenarios, such as a military conflict over Taiwan.
Expanding the use of the yuan in trade is less difficult than upgrading its status as an international reserve currency.
Capital controls are not necessarily a measure for wider adoption of the yuan in trade, as China is already a leading trading partner for more than 120 countries and the government is willing to facilitate exports by offering currency exchanges through swaps and trade finance.
However, currently,
- the controls on the flow of funds,
- coupled with the lack of renminbi assets with significant hedging against risks;
- the relatively closed nature of the Chinese financial market;
- President Xi Jinping’s preference for an alternative system of principles over the rule of law and
- the further erosion of market principles
they prevent the rise of the yuan as an international reserve currency that can openly challenge the dollar. But today there is an important line of defense to counter the excessive monetary privilege of the US currency.
