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China Should Forge Financial Security amid Geopolitical Risks

Nov 27-2022   



In light of geopolitical risks, China should attach great importance to its financial security, writes He Xiaobei, Deputy Director of NSD Macro and Green Finance Lab, in a commentary which examines financial sanctions by the US and Europe, their impacts on the global monetary system, and the lessons for China.

 

Since the 911 event, the US has shifted to using more financial sanctions and less economic ones like trade embargoes. Given the dominant position of the US dollar in the global monetary system, such sanctions have had enormous impacts on target countries such as Iran and Russia. In the commentary, He Xiaobei categorizes the major means of financial sanctions by the US according to their targets, ranging from enterprises, nationals and entities, to financial institutions and central banks.

 

Financial sanctions, if coupled with trade ones, can greatly impact on a target country’s macro-economy. He Xiaobei cites a report which showed that from 2011 to 2016, Western financial and trade sanctions caused Iran’s GDP to contract by 20% (in its own currency; in dollar terms, 36%), jobless rate to jump by 20%, and inflation to shoot up by 60%. Russia has had some breathing room due to its important role in energy supply to the EU. If the US and its ally countries were to impose sanctions on China, which does not have the same unique position as Russia, the country’s financial system might be forced to completely decouple from the international one and have to confront much harsher economic and financial environments than those faced by Russia.

 

Some countries have maneuvered to adjust their financial layouts, which has affected the international monetary landscape to some extent. These new trends offer important lessons for China’s mid and long-term strategy making. Though in 2012 China started to build Cross-border Interbank Payment System (CIPS), currently it still relies on the international financial infrastructure dominated by the US and Europe. He Xiaobei believes that digital currencies, especially those issued by central banks, are bound to greatly affect cross-border payment systems, so China should actively participate in the construction of global digital currency payment systems, including setting the standards. Even more crucial is pushing forward the international drive of the Chinese yuan. China has been in talks with energy-exporting countries like Saudi Arabia about contracts with RMB settlement. However, as yuan is not fully convertible and lacks some elements of an international reserve currency, its internationalization has run into bottlenecks. Some institutional reforms are needed to enhance foreign investors’ motivation for and confidence in holding the Chinese yuan, suggests He Xiaobei.

 

China Should Forge Financial Security amid Geopolitical Risks

Nov 27-2022   



In light of geopolitical risks, China should attach great importance to its financial security, writes He Xiaobei, Deputy Director of NSD Macro and Green Finance Lab, in a commentary which examines financial sanctions by the US and Europe, their impacts on the global monetary system, and the lessons for China.

 

Since the 911 event, the US has shifted to using more financial sanctions and less economic ones like trade embargoes. Given the dominant position of the US dollar in the global monetary system, such sanctions have had enormous impacts on target countries such as Iran and Russia. In the commentary, He Xiaobei categorizes the major means of financial sanctions by the US according to their targets, ranging from enterprises, nationals and entities, to financial institutions and central banks.

 

Financial sanctions, if coupled with trade ones, can greatly impact on a target country’s macro-economy. He Xiaobei cites a report which showed that from 2011 to 2016, Western financial and trade sanctions caused Iran’s GDP to contract by 20% (in its own currency; in dollar terms, 36%), jobless rate to jump by 20%, and inflation to shoot up by 60%. Russia has had some breathing room due to its important role in energy supply to the EU. If the US and its ally countries were to impose sanctions on China, which does not have the same unique position as Russia, the country’s financial system might be forced to completely decouple from the international one and have to confront much harsher economic and financial environments than those faced by Russia.

 

Some countries have maneuvered to adjust their financial layouts, which has affected the international monetary landscape to some extent. These new trends offer important lessons for China’s mid and long-term strategy making. Though in 2012 China started to build Cross-border Interbank Payment System (CIPS), currently it still relies on the international financial infrastructure dominated by the US and Europe. He Xiaobei believes that digital currencies, especially those issued by central banks, are bound to greatly affect cross-border payment systems, so China should actively participate in the construction of global digital currency payment systems, including setting the standards. Even more crucial is pushing forward the international drive of the Chinese yuan. China has been in talks with energy-exporting countries like Saudi Arabia about contracts with RMB settlement. However, as yuan is not fully convertible and lacks some elements of an international reserve currency, its internationalization has run into bottlenecks. Some institutional reforms are needed to enhance foreign investors’ motivation for and confidence in holding the Chinese yuan, suggests He Xiaobei.