China: Thunder, Sprinkles, and Dollar Jitters

Published on July 8, 2020

Despite the threats from Washington of severe actions to protest Beijing’s enactment and enforcement of an onerous national security law on Hong Kong, senior sources in China characterize US measures taken to date as little more than “loud thunder, but little rain” – at least for now.

The suspension of the export of sensitive US technology to Hong Kong is being brushed off as more symbolic than substantive, and similarly, visa bans over human rights violations in Xinjiang and Tibet are seen to be vague, largely inconsequential, and for domestic consumption mainly.

*** Having said that, with the US Congress having submitted a Hong Kong sanctions bill to President Donald Trump’s desk for signature into law, Beijing is laser-focused on two threats: first is whether the President will indeed now go ahead and completely revoke Hong Kong’s status as a special customs territory, and second, whether the US attempts to limit or block some Chinese financial institutions’ access to the global banking settlements system, including the SWIFT payments platform. ***

Regarding the revocation of Hong Kong’s special status, Chinese officials question why it has not happened already, and suggest that the Trump administration is in fact hesitant to pull the trigger for fear of damaging US interests.

Perhaps to put a fine point on that symbiotic relationship, they warn that should Hong Kong’s special status be “completely” revoked, the HKSAR government would halt imports of US products such as wine and beef, and strengthen the “supervision” of certain US financial institutions, accounting firms, and law firms operating in the city.

Of far greater consequence would be a US challenge to the access of any significant Chinese financial institution to dollar markets, and officials in Beijing appear particularly sensitive to US reach into the global SWIFT payments system.

While based in Belgium, US authorities have in the past successfully pressured SWIFT to clamp down on terror financing, and more relevant to Beijing, to deny Iran’s banking system access to the platform to enforce sanctions against the Islamic regime.

China, of course, is not Iran, and an attempt to deny access to banks in China – as laid out in the Toomey-Van Hollen Hong Kong Autonomy Act, albeit with a grace period of well over a year — would in effect constitute a declaration of financial war with the world’s second largest economy. As such, senior economic officials in Beijing believe their counterparts in the US, led by Treasury Secretary Steven Mnuchin, would most definitely block such a “dangerous” move.

Should Trump nevertheless choose to block some Chinese banks’ access to dollar funding and from the SWIFT system, Beijing vows to “launch a counterattack against US hegemony.”

Countermeasures, from what we understand, would include a speeding up of the use of the Renminbi for China’s own parallel Cross-border Interbank Payment System (CIPS), a boost to the issuance of RMB denominated loans to Belt and Road Initiative countries, a push for greater RMB use through the Shanghai International Energy Exchange (INE) crude oil futures, and acceleration of the implementation of China’s Digital Currency Electronics Payment (DCEP), the first digital currency issued by a central bank.  

Despite leaks from the State Department to the contrary – and even these have been hugely couched — that level of escalation appears, for now, to be unlikely. But it has rung the alarm bells.

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