SHANGHAI, China: A sharp escalation in tensions with the US has stoked fears in China of a deepening financial war that could result in it being shut out of the global dollar system — a devastating prospect once considered far-fetched but now not impossible.
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 US debt holdings.
Those concerns have galvanized some in Beijing to revive calls to bolster the yuan’s global cloutas 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 internationalization 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-US 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 penalizing China, including proposals to bar US listings of Chinese companies that fail to meet US accounting standards and bans on the Chinese-owned TikTok and WeChat apps.
Further tension is expected in the run-up to US elections on Nov. 3.
“A broad financial war has already started . . . the most lethal tactics have yet to be used,” said Yu Yongding, an economist at the state-backed Chinese Academy of Social Sciences (CASS) who previously advised the PBOC.
Yu said the ultimate sanction would involve US seizures of China’s US assets — Beijing holds more than $1 trillion yuan in US government debt — which would be difficult to implement and a self-inflicted wound for Washington.
But calling US leaders “extremists,” Yu said a decoupling is not impossible, so China should make preparations.
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 US debt could roil financial markets and hurt the global economy, analysts said.
Fang Xinghai, a senior securities regulator, said that China is vulnerable to US sanctions and should make “early” and “real” preparations. “Such things have already happened to many Russian businesses and financial institutions,” Fang told a forum organized 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 that Beijing should ready itself for decoupling.
“We have to mentally prepare that the United States could expel China from the dollar settlement system,” he said.
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.
