May 03, 2024 | Andrew Collier
Executive Summary
The Wall Street Journal reported that the U.S. is considering imposing sanctions on Chinese banks that are supporting the export of goods to for Russia’s war in Ukraine. The State Department has denied the reports but it would be logical for the U.S. to use its dominance of the US dollar financial system as leverage against China. But would sanctions work? The short answer is – yes, but it would take time because China’s vast banking system and large territory makes it easier for Chinese institutions to hide their support for Russia.
However, the short answer is there is little that China can do in the near future to sanction proof its economy. It has far too many ties to the US dollar system and there is too little progress in the globalization of the yuan to turn China’s currency into an alternative to the US dollar. To discuss this issue in more detail we would need to break it into two parts: the technology of currency flows; and the political questions regarding China’s involvement in global trade and the degree of its control over the domestic banks and local governments. On the technical side, despite vast efforts to globalize the yuan, it still accounts for less than 5 percent of global payments and the bulk of those are with countries in Asia that are receiving financial support from China or are involved in loan programs such as the Belt and Road. To increase the global use of the yuan, the PBOC has negotiated bilateral currency swap agreements with at least 39 central banks, totalling close to 4 trillion yuan. Unlike the Federal Reserve swaps, though, these are not permanent and are not available in unlimited amounts.
Does Beijing have the structures in place to regulate bank support for the hidden Russian trade?
The political question is — how much influence would U.S. sanctions have on Chinese banks? This is a tough question, namely because the Chinese banking system is complicated. The chart below tells the part of story. More than half of Chinese banks are state owned. They have a strong interest in maintaining links to the US dollar-centric world and have been quick to adhere to previous U.S. sanctions. One of the largest of the globally oriented Chinese banks (and my former employer) is the Bank of China. The BOC’s balance sheet indicates that their exposure to the U.S. dollar is growing, not shrinking. This is an indication they are wiling to adhere to U.S. policies regarding Russian sanctions.