China should prepare for a possible disconnection from the SWIFT global settlement system, said Vice Chairman of the Securities Control Committee of China, Fan Xinghai. Another goal of Beijing is the “internationalization of the renminbi,” that is, replacing the dollar with its own currency in international transactions.
Society for Worldwide Interbank Financial Telecommunications has more than 11,000 organizations in 200 countries. Since the beginning of the year, more than four billion payments have already passed through this system.
Formally, SWIFT is a private company, but since it is settled in dollars, it is vitally dependent on the US Federal Reserve and, accordingly, the US authorities.
“We must prepare to disconnect from SWIFT in advance, truly, and not just psychologically,” said Fan Xinghai, adding that “China is now vulnerable to Washington’s potential sanctions.”
The immediate reason for this demarche is Washington’s intention to impose sanctions against Chinese officials involved in violating the rights of Muslims in China. The corresponding bill, Donald Trump signed on June 17.
A week earlier, Republican congressmen presented a 120-page report on “Strengthening America and Countering Global Threats,” which suggested about 130 possible measures to influence “real US adversaries” – Russia, China and Iran.
One of them is to demand from SWIFT to stop cooperation with banks from unfriendly countries. Moreover, in this regard, the Republicans mentioned just a violation of the rights of the Muslim population in China.
So Beijing has every reason to expect that personal sanctions will be followed by economic ones. Not surprisingly, the Chinese decided to take the lead and seriously prepare for disconnecting from SWIFT.
Yuan instead of the dollar
But there is a second, more important factor – concerns about the prospects for the dollar. As Fan Xinghai noted, a sharp depreciation of the US currency is increasingly likely, which could have a very negative effect on China.
Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, spoke about the same thing last week. In a report at a banking forum in Shanghai, he noted that the US Federal Reserve, “being the de facto central bank of the world,” has recently become overly keen on printing money.
“Some say: domestic debt is not debt, real debt is only external,” Goo reasoned. “But for the United States, even external debt is essentially not debt. It has worked for decades, but it cannot go on forever.”
In his opinion, pumping the American economy with dollars only turned into a record growth in stock markets, which completely lost touch with reality. “The scale of distortion is unprecedented,” said Guo Shuqing. “But this is not a free lunch: we should all be wary of devaluation.”
And the Chinese are not alone in this. Even in the USA, amid the rampant work of the printing press, there is talk of ending the era of the dollar as the world’s main reserve currency.
“In 2021, the dollar could depreciate by 35%,” warns former Morgan Stanley Asia CEO Stephen Roach. This will result in a sharp reduction in savings of the population and an increase in public debt amid record injections of unsecured money into the economy.
Indeed, since 2008, the Federal Reserve has printed about eight trillion dollars, and this year alone plans to add five more. So to avoid the weakening of the American currency is unlikely to succeed.
For China, which has invested more than a trillion in US government bonds, devaluation threatens with enormous losses. Therefore, Beijing wants to minimize risk by promoting the yuan as an alternative.
“If our foreign assets were in RMB, then there would not have been such concerns,” said Fan Xinghai. “Internationalization of the RMB will allow us to compensate for external financial pressure.”
There is an alternative
Recall that Russian lawmakers are threatening Russia with disconnecting from SWIFT since the start of the sanctions war in 2014. In response, the Central Bank developed its own financial messaging system (SPFS).
By January 1, 2020, SPFS had 391 users. In 2019, participants in the system sent about 12.9 million messages.
China introduced the China International Payments System (CIPS) a little earlier. And last year, at the November BRICS summit, Russia and China agreed to unite payment systems for international payments.
SFPS provides settlements in rubles, CIPS – in RMB, as a result, users are not dependent on the United States and SWIFT. And at the same time they get rid of the need to pay in American currency, weakening its position as a reserve.