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Chinese officials and economists have in recent months been
unusually public in discussing worst-case scenarios under which
China is blocked from dollar settlements, or Washington freezes
or confiscates a portion of China's huge U.S. debt holdings.
Those concerns have galvanised some in Beijing to revive calls
to bolster the yuan's global clout as it looks to decrease
reliance on the greenback.
Some economists even float the idea of settling exports of
China-made COVID-19 vaccines in yuan, and are looking to bypass
dollar settlement with a digital version of the currency.
"Yuan internationalisation was a good-to-have. It's now becoming
a must-have," said Shuang Ding, head of Greater China economic
research at Standard Chartered and a former economist at the
People's Bank of China (PBOC).
The threat of Sino-U.S. financial "decoupling" is becoming
"clear and present", Ding said.
Although a complete separation of the world's two largest
economies is unlikely, the Trump administration has been pushing
for a partial decoupling in key areas related to trade,
technology and financial activity.
Washington has unleashed a barrage of actions penalising China,
including proposals to bar U.S. listings of Chinese companies
that fail to meet U.S. accounting standards and bans on the
Chinese-owned TikTok and WeChat apps. Further tension is
expected in the run-up to U.S. elections on Nov. 3.
"A broad financial war has already started ... the most lethal
tactics have yet to be 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 ultimate sanction would involve U.S. seizures of
China's U.S. assets - Beijing holds over $1 trillion yuan in
U.S. government debt - which would be difficult to implement and
a self-inflicted wound for Washington.
But calling U.S. leaders "extremists", Yu said a decoupling is
not impossible, so China should make preparations.
HIGH STAKES
The stakes are high. Any move by Washington to cut China off
from the dollar system or retaliation by Beijing to sell a big
chunk of U.S. debt could roil financial markets and hurt the
global economy, analysts said.
Fang Xinghai, a senior securities regulator, said China is
vulnerable to U.S. sanctions and should make "early" and "real"
preparations. "Such things have already happened to many Russian
businesses and financial institutions," Fang told a June forum
organised by Chinese media outlet Caixin.
Guan Tao, former director of the international payments
department of China's State Administration of Foreign Exchange
and now chief global economist at BOC International (China),
also said Beijing should ready itself for decoupling.
"We have to mentally prepare that the United States could expel
China from the dollar settlement system," he told Reuters.
In a report he co-authored last month, Guan called for increased
use of China's yuan settlement system, Cross-Border Interbank
Payment System, in global trade. Most of China's cross-border
transactions are settled in dollars via the SWIFT system, which
some say leaves it vulnerable.
RENEWED PUSH
After a five-year lull, Beijing is reviving its push to
globalise the yuan.
The PBOC's Shanghai head office last month urged financial
institutions to expand yuan trade and prioritise local currency
use in direct investment.
Central bank chief Yi Gang said in remarks published on Sunday
that yuan internationalisation is proceeding well, with
cross-border settlements growing 36.7% in the first half of 2020
from a year earlier.
Still, internationalisation is hampered by China's own stringent
capital controls. It could also face resistance from countries
that have criticised China on matters ranging from the
coronavirus to its clampdown on Hong Kong.
The yuan's share of global foreign exchange reserves surpassed
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 accelerate 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 on the back of currency swaps between central
banks, bypassing systems such as SWIFT, said Ding Jianping,
finance professor at Shanghai University of Finance and
Economics.
China has fast-tracked plans to develop a sovereign digital
currency, while the PBOC has been busy signing currency swap
deals with foreign counterparts.
Shuang Ding of Standard Chartered said Beijing has no choice but
to prepare for Washington's "nuclear option" of kicking China
out of the dollar system.
"Beijing cannot afford to be thrown into disarray when sanctions
indeed befall China," he said.
(Reporting by Kevin Yao in Beijing; Winni Zhou and Samuel Shen
in Shanghai; Editing by Tony Munroe and Sam Holmes)
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