Newly translated documents discussed in these analyses include:

1. The Weaponization of Global Financial Public Goods and Its Formation Mechanism by Zhou Yu, director of the Center for International Financial and Monetary Studies at the Shanghai Academy of Social Sciences’ Institute of World Economics.
2. Logical Analysis of U.S. Financial Sanctions and China’s Contingency Plans by Chen Hongxiang, a researcher affiliated with a People’s Bank of China municipal sub-branch in Yancheng, Jiangsu Province.
3. Impact of Financial Sanctions on National Financial Security and Countermeasures by Zhang Bei, deputy director and senior economist at the Financial Research Institute of the People’s Bank of China.

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Karen Sutter | Michael Hirson | Meg Rithmire

Three new articles translated for Interpret: China focus on the U.S. government’s use of dollar sanctions and the potential issues this presents for China. The authors analytically frame China in a defensive and reactive position and are silent on China’s active use of economic coercion and informal and formal sanctions. The articles do not discuss broader PRC concerns about the U.S. dollar’s global role outside of financial sanctions and the specific ways in which China is seeking to diversify from the U.S. dollar and increase global use of China’s currency, the renminbi (RMB).

Zhou Yu of the Shanghai Academy of Social Sciences focuses on U.S.-led multilateral sanctions against Russia following Moscow’s re-invasion of Ukraine in February 2022. Zhou argues that as the global currency, the U.S. dollar is a “public good” that should not be “weaponized” by the United States through sanctions. Zhou does not discuss how the United States provides this “public good,” including by sustaining an open economy and capital markets, and the ways in which the United States supports the global financial system, such as by providing dollar liquidity during crises. Zhou’s analysis relies on U.S. academic writings on the dollar and foreign views of U.S. sanctions rather than disclosing PRC views and debates. He says that the justification for U.S. sanctions has dramatically shifted in the case of Russia, ignoring the long-standing U.S. use of sanctions in response to foreign policy interests—potentially seeking to delegitimize the pretext for them—and ignoring the shared concerns of countries that joined the United States in imposing sanctions, including several Asian nations.

Chen Hongxiang of the Yangcheng sub-branch of the People’s Bank of China (PBOC) focuses on the leading role of SWIFT, the current global architecture for cross-border payments. He calls for SWIFT reform, arguably to include a stronger role for China, but does not mention China’s ongoing efforts to gain influence, such as by establishing a joint venture with SWIFT, conducting de-dollarization efforts in trade, and developing a central bank digital currency. Chen introduces a concept of the “three islands of financial stability”—the U.S. dollar, the euro, and the renminbi—as a way to increase China’s influence in global financial rule setting and global finance without commensurate liberalization and convertibility of the renminbi on China’s capital account. The article mentions that China’s Cross-border Interbank Payment System (CIPS) and China UnionPay are vulnerable because they use U.S. software. Chen identifies specific areas in which China can exploit U.S. sanctions policy gaps and policy differences among countries.

Zhang Bei of the PBOC Financial Research Institute argues that financial services are a key aspect of a country’s competitiveness and national security. Zhang assesses that the U.S. use of financial sanctions has been clear and precise, is often combined with other economic measures, and is less costly than other policy options. However, Zhang expresses concern about the growing U.S. use of secondary sanctions but does not elaborate on how this affects China. She highlights U.S. influence in SWIFT and the visibility SWIFT offers U.S. policymakers in imposing sanctions. According to Zhang, key factors in sanctions’ effectiveness include the financial strength of the initiator and recipient of sanctions, as well as the extent to which other countries join on. Zhang proposes that to prepare for U.S. financial sanctions, China should develop policy countermeasures, address its own financial security risks, liberalize the financial sector, and further internationalize the renminbi.

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Many in China were stunned by the speed and cohesiveness of the Western financial response to Russia’s invasion of Ukraine, which included cutting off major Russian banks’ access to the SWIFT messaging system and freezing Russia’s reserves held abroad. Noting that the United States and its Group of Seven (G7) partners could use these same tools against China, including in the event of a conflict over Taiwan, the authors of these three essays seek to understand how and why the United States possesses this power and to chart strategies for China to lower its risks. Their collective conclusions are sobering for Beijing.

While the essay by Zhou Yu of the Shanghai Academy of Social Sciences is largely theoretical, the essays by Zhang Bei and Chen Hongxiang of the People’s Bank of China (PBOC) focus on practical considerations for China. Their recommendations fall into two main buckets: resilience measures that aim to reduce China’s vulnerability to Western sanctions and deterrence measures that aim to increase the costs for the sanctioning country. Both have major limitations, at least in the near term.

While the authors recommend boosting China’s resilience through further steps to internationalize the renminbi (RMB), they acknowledge that this is a long-term project, in part because of self-imposed constraints such as China’s extensive use of capital controls to safeguard domestic financial stability. For all the hype over China’s rollout of a central bank digital currency, the analysts regard it as merely a potential tool, not a silver bullet. They encourage continued efforts by the PBOC to develop a parallel payments infrastructure that could operate independently of the SWIFT messaging system in a crisis, while acknowledging it is not yet ready for launch.

Other proposed resilience measures include reducing the amount of China’s reserves held in U.S. dollar assets, an effort already underway but that provides less relief in a world where Chinese assets in other G7 currencies are also at risk of seizure. Underscoring that sanctions are a reality with which China must contend, the authors emphasize the need to ensure that Chinese banks understand how to legally comply with Western sanctions to avoid taking unnecessary risks.

There are also major limits to China’s potential deterrence measures. The authors endorse recent steps by Beijing to establish a domestic legal basis for countering foreign sanctions imposed on Chinese entities but hold out little hope that this will be enough to shape decisions in Western capitals. They also largely dismiss the attractiveness of China trying to punish the United States by selling Beijing’s holdings of U.S. treasuries or other U.S. assets.

Chen argues that China can boost its leverage by deepening its centrality in global supply chains, thereby increasing the economic costs to the United States and its partners if and when they impose sanctions on China. This echoes statements that General Secretary Xi Jinping has also made in recent years, citing China’s dominance in industries such as clean-energy technology as a powerful form of deterrence. Chinese policymakers and analysts alike appear to view China’s main deterrence capabilities as stemming from its large market and role in global trade rather than in trying to match the United States in financial firepower.

It is not hard to see that there are inherent tensions between the strategies above. Imposing harsh countersanctions against a U.S. financial institution, for example, would discourage the investment in China that is necessary to internationalize its currency and maintain its centrality in supply chains. While the authors do not address these tradeoffs explicitly, they acknowledge them through an overall tone of encouraging policymakers to use discipline and level-headed thinking in addressing the risk of U.S. sanctions. All three papers argue that the United States, by exploiting financial sanctions to an unprecedented degree, has created incentives for many countries to reduce dependence on the dollar—a set of conditions, they argue, which China should approach with long-term strategic patience.

Indeed, a central theme emerges that even though U.S. sanctions are (in China’s eyes) an abuse of globalization, China’s best response is not to turn inward but to deepen its global integration—including through further opening its financial sector—while advocating for a more balanced international financial system. Such an approach will take significant commitment on the part of China’s leadership: Support within China for further financial opening may come under pressure amid intense U.S.-China tensions and a domestic political environment focused on vigilance against risks to financial stability and national security.

When it comes to China’s international diplomacy, it is notable that Zhou describes U.S. sanctions against Russia as a weaponization of “global public goods.” To many in the United States, this framing seems nonsensical or irrelevant given Russia’s aggression against Ukraine (and China’s support for Moscow), but it is still a perspective worth understanding—in part because it has resonance outside of China as well. While the United States views Russia’s invasion as the ultimate violation of the “rules-based international order,” many countries see the United States as exploiting its dominance of the global financial system in its own favor. This is a concern not only of “pariah states,” but also authoritarian regimes with a shaky relationship with Washington (such as the Gulf States). In the coming years, it will be a key part of China’s pitch for a multipolar currency system.

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In the years since the attacks of 9/11, and especially after Russia’s invasions of Crimea and Ukraine, sanctions—the main instrument of what is generally called “economic statecraft”—have become the primary instrument through which the United States pursues its geopolitical goals. This is the consensus of both academic and other commentary from the West and, as seen by the articles translated for Interpret: China, also the view from Beijing. Each author expresses a predictable frustration at the amount of power the United States wields through dollar centrality and control over global payments systems (e.g., SWIFT), but the analysis is strikingly dispassionate in its focus on the long-term development of sanctions and the expansion of “long-arm jurisdiction,” which typically refers to secondary sanctions that have extraterritorial impacts. In short, the Chinese view of the evolution of financial sanctions accords with general views outside of China and in the United States itself. 

Three notable conclusions emerge from the scholars’ analysis of the long-term impact of this form of economic statecraft and China’s possible responses. 

First, both Zhou Yu, a researcher at the Shanghai Academy of Social Sciences, and Chen Hongxiang, with the People’s Bank of China (PBOC), have embraced the analysis that growing “weaponization” of the U.S. dollar and the global financial system could erode U.S. centrality in the medium and long term. Zhou, citing various U.S. and European scholars, argues that some countries and financial-system participants will seek ways to disintermediate the U.S. dollar, ultimately weakening the dollar’s global primacy. None of the articles predict a rapid shift toward currency diversification, but all express concern that unpredictability and fear of sanctions exposure will adversely affect the global economy because of the absence of stable financial hegemon. Zhou references the “Kindleberger Trap,” by which a rising power fails to provide global financial public goods in the context of hegemonic shift, and states plainly that the decline of U.S. financial hegemony will not be met with Chinese provision of global financial public goods. The authors entertain various scenarios, including continued dollar primacy and global currency fragmentation wherein alternative payment systems emerge and global willingness to hold U.S. Treasury bonds wanes. Here, the Chinese analysts are clearly not alone, as secondary sanctions have tested the transatlantic alliance, and prominent politicians of the Global South have forcefully called for worldwide currency diversification. 

However, none of the authors conclude that the renminbi (RMB) could or should replace the U.S. dollar as a primary global currency of exchange. Both Zhou Yu and Zhang Bei, a senior economist at the PBOC, recognize the significant costs associated with dollar primacy for the United States and others, and they acknowledge the value of limits on renminbi currency convertibility for China’s financial stability. In this, Chinese monetary policy has been consistent for decades; the 1997 Asian financial crisis demonstrated to Chinese policymakers that open capital accounts can be economically and politically destabilizing. Modest efforts to internationalize the renminbi should not be confused with a concerted effort to displace and replace the U.S. dollar. The Xi Jinping administration and the PBOC have showed little appetite for financial instability, and the Zhang article highlights that domestic financial instability and rapid capital flows would only amplify the possible impacts of potential sanctions against China. To be sure, each author calls for internationalizing the renminbi, but gradually and in a limited fashion as China manages its own domestic challenges and international commitments. 

Strikingly, the papers argue that the best “counter-sanctions” strategies ought to involve strengthening global rules, expanding liberalization for China, and even complying with sanctions to a degree. All three papers call for proactive measures to anticipate a world in which China may be the target of U.S. sanctions, and Chen in particular believes these measures could involve counter-sanctioning U.S. firms or freezing U.S. assets. But even Chen does not recommend consideration for backlash, instead cautioning restraint. Chen and Zhang both recommend global cooperation on issues of shared interest, for example combating money laundering, participating in and promoting multilateral rule building, and enacting domestic financial liberalization with appropriate regulation to buttress China’s financial strength for any situation. 

The focus on financial security as national security in China is neither new (Article 20 of the 2015 National Security Law codified this relationship) nor unique to China. But the picture these papers paint is not one of an aspiring global hegemon or a powerful country seeking self-reliance, but rather a rising power with a sober understanding of its risks and limitations anticipating a multipolar—and potentially unstable—future global financial system in need of good rules.

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