Summary and Analysis: China and United States Situation

A new troubling question is suddenly looming over Beijing: will the administration of Trump abuse the power of the United States dollar to hurt China? This was after Beijing’s plans to commit a new national security law in Hong Kong came to fruition.

The probability remains very low that China’s case will be similar to that of Iran or Russia. Moreover, the United States President, Donald Trump, has not mentioned sanctions against Chinese financial institutions in Hong Kong. The risk of economic war is no longer “unthinkable” for China. This would include being cut off from the United States dollar system.

Analysts and officials say that if Washington were to sever the financial and corporate systems of China from the United States dollar payments system, it could start a financial tsunami that will lead global finance into uncharted territory. Several infrastructures, such as the Swift international payments messaging system and the Chips (Clearing House Interbank Payments System), underpin the United States dollar payment system.

A Chinese official has been in on the internal discussions. These internal discussions concerned Beijing’s response to a possible United States reaction to the national security law in Hong Kong. He/she said that this would be a nuclear option for the United States. It would hurt China. Nevertheless, it would probably destroy the United States more.

The official declined to name him/her. He/she says that Chinese capital sees the scenario as a “low probability event” and as a last resort. The source said that such an act would be closer to a Hot War than a Cold War.

China

The stakes cannot be higher because they could severely alter the world’s economic landscape for years to come.

China relies on the United States dollar, like virtually every other country in the world. The dollar is a payment method for most international trade, investment, and financing activities. Moreover, Hong Kong’s financial institutions often act as a gateway.

China’s use of the United States dollar has helped America maintain its currency’s “exorbitant privilege” in the international monetary system.  The Exorbitant privilege was the phrase used by former French Finance Minister Valery Giscard d’Estaing in 1965.

Beijing’s perception of the United States dollar is complex. On the one hand, the government in China sits on the largest stockpile in the world for foreign reserves, over half of which is in dollar-denominated assets. Moreover, Beijing regards the United States dollar as a kind of strategic asset. It limits the ability of citizens of China to exchange the yuan for the dollar to US$50,000 per year. Thus, they do this to keep a wary eye on companies transferring dollars out of the country.

On the other hand, Beijing tried hard over the last decade to undermine the power of the United States dollar. The former central bank governor of China-proposed, in 2009, that a new super sovereign currency must replace the dollar.

China encouraged the use of the yuan in trade settlements. It set up a market in Shanghai for trading yuan-denominated crude oil futures contracts. By doing this, it has developed a cross-border yuan payment system.