Foreign Policy: Ukraine's war is pushing China to disengage from the global economy

China is accelerating its disengagement from the global economy and a reassessment of Western financial power after the Ukraine-Russia war.

In an analytical article in the American magazine "Foreign Policy", Diana Chueleva, chief economist at Enodo Economics Ltd. in London, wrote that the sanctions imposed by Western countries on Russia in response to its war on Ukraine appear to be It will accelerate the economic decoupling now underway between the United States and China, especially if Beijing seizes the opportunity to enhance the attractiveness of its national currency and financial structure on a global scale.

The writer considered that Washington's deprivation of Russia from access to about half of its reserves of foreign currencies and gold - estimated at 630 billion US dollars - was proof that "brute" financial power is still in the hands of the West, which can only strengthen the resolve China has to cling to its ideological path and carve out its own geopolitical sphere of influence.

The United States and other large Western countries have previously banned most Russian creditors from using the bank transfer system known as "SWIFT" (SWIFT), which is operated by the Association for Worldwide Interbank Financial Telecommunication and provides a secure messaging network to ensure rapid payments across borders and has become an essential mechanism for financing trade Globalism.

It is likely - according to the expert Chueleva - that these sanctions will accelerate the creation of divisions and ramifications in the global economic and financial system, a process that Enodo Economics described a few years ago as "the great separation."

The author of the article expects Beijing to be able to accelerate its efforts to boost the yuan's circulation in global markets, spurred by Western sanctions against Russia.

Self-reliance

The author of the article explained that “financial self-reliance” will be a prominent feature of the emerging new order, and China is not the only country that has refrained from condemning Russia for its war on Ukraine, and has expressed concern about sanctions.

Any country that is uncomfortable with the West's "vicious" display of financial power may take measures to guard against dependence on the dollar by participating in Russian and Chinese alternatives.

Economist Choeleva says that Russia has been dependent on the BRICS group, which includes in its membership 5 countries with emerging economies (Brazil, Russia, India, China and South Africa) to expand the circulation of their national currencies in the field of trade and the integration of their payment systems.

In her article, the writer quoted Russian Finance Minister Anton Siluanov as saying that he believed that these steps were necessary, because Western sanctions have undermined the foundations of the current dollar-based monetary and financial system.

Russia has established its own system of bank transfers, known as SPFS, as an alternative to the SWIFT system, from which it has been sacked.

The Russian Mir card payment system - similar to Visa and MasterCard - became operational in 2015.

However, Russia's share in the global economy is small, according to a Foreign Policy article. If countries do not want financial and economic participation with the West and stick to the dollar currency, they have only one realistic option, which is China and its yuan, which is also known as the "renminbi."

dollar strength

Expectations of dethroning the dollar, as the most prominent reserve currency, are very old, but if Beijing can make its financial system and cross-border payments more attractive, and strengthen the position of its currency, the renminbi, the dominance of the dollar may erode over time, according to the Foreign Policy article.

The writer advises China to be careful in its steps and to make sure that its banks do not violate Western sanctions in case it increases its credit facilities to Russia as a favor to its President Vladimir Putin.

Given that 75% of Chinese goods invoices are still paid in dollars, denying Beijing the dollar clearing system and the use of the SWIFT network will have incalculable consequences for Chinese banks and the global economy alike.

One likely course of action, however, is for China to accelerate the development and use of its cross-border interbank payment system (CIPS) around the world.

Given that 75% of Chinese goods invoices are still paid in dollars, denying Beijing the dollar clearing system and the use of the SWIFT network would have immeasurable consequences for Chinese banks and the global economy alike.

Cibes is a payment system that provides clearing and settlement services to participants in cross-border payments and trade in renminbi, with the support of the People's Bank of China, which was launched in 2015 to reduce the country's need to transact in dollars through US banks.

China began to internationalize its currency, the yuan, in reaction to the global financial crisis that occurred in 2008, so the use of the yuan increased in cross-border trade, and central banks began to keep it in their currency reserves, and it was added to the basket of currencies that constitute the reserve assets of the International Monetary Fund, which is Special Drawing Rights.

The internationalization of the yuan seemed to be succeeding at first, albeit very slowly, but the process culminated in 2015 when the People’s Bank of China failed to change the mechanism of the daily central exchange rate of the renminbi against the US dollar, causing it to decline by about 3% within two days.

As the yuan depreciated and the renminbi's internationalization began to decline, it became clear that the success achieved up until then had been driven by the desire of foreigners to hold an ever-increasing currency.

Evaluate the steps

All of this forced China to undertake a process of reassessing its steps, according to the author of the article, who adds that Beijing needed to give foreigners a good reason to hold the yuan rather than simply relying on the currency's continuing appreciation, and China began in 2018 by strengthening its domestic capital markets and opening them up to foreign investors.

The author of the article expects that Beijing will now be able to accelerate its efforts to boost the yuan's circulation in global markets, prompted by Western sanctions imposed on Russia.

Similar to the coronavirus pandemic, the invasion of Ukraine will deepen the global rift between rule-based economies led by the United States and their “authoritarian opponents,” making inflationary pressures worse.

Perhaps one of the results of the war in Ukraine is that the global economy is on the cusp of a massive change, and whoever succeeds in turning the dilemma of inflation accompanied by economic stagnation into an opportunity to boost innovation, increase domestic productivity and build a vital sphere of influence, will be the winner in the end, according to the article.