China had started 2020 with the ambitions of world dominance, but it seems that its global ambitions would be done and dusted by the end of this year itself. The strong US-China decoupling is paving the way for big and brutal sanctions against China, and ultimately Washington could exercise the ultimate ‘Nuclear option’, that is, kicking China out of the global dollar-based system to destroy the Chinese economy.
China itself seems wary of the United States using the final option, that is, blocking Beijing’s use of Dollars for international payments. The US Dollars is the world’s premier reserve currency used for settlement of cross-border transactions. Therefore, anyone pushed out of the global dollars banking system gets marginalised and finds it hard to return to the mainstream. In this context, Chinese banks have already started complying with American sanctions on Hong Kong.
According to a Bloomberg report, the biggest of China’s state-run banks are now taking initial steps to comply with the US sanctions on 11 sanctioned Hong Kong officials, including the Hong Kong Chief Executive Carrie Lam. People familiar with the development have told Bloomberg that the Chinese state-run banks have turned cautious in opening new accounts for the sanctioned officials.
Meanwhile, one bank is said to have suspended the opening of new bank accounts for sanctioned Hong Kong officials. The reason behind the strict compliance with American sanctions is the risk of getting kicked out of the access to dollar funding and global dollars-based payments system.
The four largest Chinese banks- Industrial & Commercial Bank of China, the China Construction Bank, the Agricultural Bank of China, and the Bank of China understand that unlike Beijing, Washington’s dominance doesn’t work only on verbal threats. American sanctions can be painful because they do not only target officials, but also those institutions that provide financial services to sanctioned officials.
American sanctions actually work as a trap and if an institution violates it, then such institution itself gets weighed down when the US weaponizes the greenback’s dominance. This is how the US also entrapped North Korea, Iran, Russia and Venezuela into long-term financial crises.
Therefore, if Chinese banks continue to transact with the 11 sanctioned Hong Kong officials, then they themselves could get cut out of the dollars-based international system. A lot is at stake for the four largest Chinese banks. Last year, they had received 1.1 trillion US dollars funding. Now, if Trump weaponizes the dollar dominance, then the Chinese banking system would come crashing down with a severe 1.1 trillion Dollars jolt.
US-China tensions are at an all-time high, and the Trump administration is making a political issue out of the China challenge. Trump has already waged a trade war with Beijing, followed by attempts to throw China out of the global supply chains.
As tensions escalate even further in the run up to the US Presidential polls, there is every possibility of Trump kicking China out of the global dollars payment system to merge as a strong leader who shattered Beijing’s global dominance ambitions.
Beijing is itself treading cautiously, because despite several attempts it has failed to make Yuan a real international currency. China cannot bypass the greenback in international transactions, because the US dollar continues to dominate the cross-border settlements system. Following the 2015 stock market crash, Beijing has itself side-lined its Yuan internationalisation plans.
If the US kicks China out of the Dollar system, then it could prove to be the severest blow to the Chinese economy till date. An incapacitated China would find it virtually impossible to engage in global trade, if and when, the US exercises the nuclear option. And quite literally, the only option left with China would be barter trade- a true nightmare for the exports-based economy.
Leave a Reply