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Monday, December 5, 2022

CHINA TO DE-COUPLE FROM THE U.S. FINANCIAL SYSTEM? #433

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GOOD MORNING FROM LONDON

China’s holdings of U.S. government debt have fallen below $1 trillion for the first time since 2010, with concerns about the risk of Russia-style sanctions accelerating a long-term financial decoupling driven by political tensions re Ukraine, Taiwan and Hong Kong. The holdings stood at $980.7 billion at the end of May 2022, shrinking by $22.6 billion from April 2022.

The Western-led freeze on half of Russia’s gold and foreign exchange was a warning to China – the world’s largest holder of foreign reserves. Its international assets could be grabbed too. Is Washington weaponizing the entire world’s financial system? Is this part of the worldwide Geo-Political Shift in Power?

Yu Yongding, a prominent economist and former adviser to the People’s Bank of China, told Nikkei Asia, referring to the freezing of Russia’s reserves. “We never expected that the U.S. would freeze a country’s foreign currency reserves. And this action has fundamentally undermined national credibility in the international monetary system. Now the question is, if the U.S. stops playing by rules, what can China do to guarantee the safety of its foreign assets.?” And He Weiwen, a former Chinese diplomat to the U.S., currently a senior fellow at the Center for China and Globalization (CCG), a Beijing-based think tank said “Sanctions on Russia are a textbook example for China. If the U.S. intends to impose devastating sanctions on China, this may be the way. So, we must be prepared.”

There is recent history. Iranian banks were disconnected from SWIFT in 2012, and then in 2014, the threat was made by the US of SWIFT sanctions on Russia following its intervention in  Crimea + part of eastern Ukraine. In 2020 following the introduction of the National Security Law in Hong Kong Chinese banks were urged to switch away from SWIFT.

Now, as geopolitical tensions rapidly intensify, Nikkei Asia says China will diversify its dollar-denominated assets, accelerate yuan internationalization and the application of the digital yuan in cross-border payments. China will also seek to dismantle the dollar-centred financial hegemony in the long run. The Balance of World Power is Changing.

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