Will China enter a new trade war with the United States?

Chinese policymakers are increasingly convinced that the United States is determined to implement a full-fledged strategy to contain China, which is why Chinese officials, academics, and media are increasingly talking about autonomy and preparing for a forced separation from the United States.

In a report published by the American magazine "Foreign Policy", writer Zhongyuan Xue Liu says that Fang Shanghai, vice-chairman of the China Securities Regulatory Commission, suggested accelerating the internationalization of the yuan to prepare for the risks of forced financial separation, and a Shanghai-based academic argues that "the peace gains are over, It is time for China to prepare for a full separation.” More moderate voices acknowledge the profound changes in US-China relations underlying the "decoupling theory" and called on China to "prepare for the worst and strive for the best."

The writer expects that the additional strengthening of the Chinese army will be part of the possible response, while the party state is also expected to resort to tightening two economic restrictions, and will double the pursuit of the strategy of self-reliance and protect the Chinese economy from sanctions while developing its offensive geoeconomic capabilities by strengthening the position of China is strategically positioned in global supply chains and expanding its influence in the sea lanes of international trade.

"Independence and self-reliance" are the basis of the historic decision of the Chinese Communist Party issued in 2021, and the harsh sanctions recently imposed by the West on Russia have reminded Chinese leaders of the need to strengthen economic independence.

On February 25 - the day after Russia's war on Ukraine - an article in the People's Daily argued that "independence and self-reliance ensure that the cause of the party and the people will continue to win."

For its part, the government recently pledged to improve self-reliance by building a "national single market", and policymakers are looking to prepare the Chinese economy to withstand the severe economic blow of forced secession.

Chinese yuan strengthening

The writer explains that one of the main approaches to China's defense strategy against perceived Western containment is to build a global commodity trading system based on the yuan, in an attempt to improve the pricing power of the yuan and enhance China's strength in global resource trade and its global financial position, and at the present time major oil exporters to China such as Russia accept Angola, Venezuela, Iran and Nigeria yuan currency in exchanges with China.

The Shanghai International Energy Exchange launched the Shanghai yuan-based crude oil futures contract in 2018, and in April 2021 the total trade volume of yuan-based oil futures contracts reached 44 trillion yuan ($6.7 trillion) with clients from 23 countries.

Oil exporters can convert their RMB oil revenue into gold on the gold exchanges in Shanghai and Hong Kong, and the interoperability indicates that China (the world's largest oil importer) has a complete domestic infrastructure to trade oil indirectly using gold.

According to the author, China can take advantage of the current energy transition to develop “gasyuan” to simulate the petrodollar, and just as oil-producing countries depend on dollar revenues that cannot be spent freely elsewhere, gas-producing countries such as Russia and Iran can rely on the yuan.

In the 2017 China World Energy Development Report, Chinese scholars proposed the concept of "gasiyuan." Given the fragmented nature of global natural gas markets and China's position as a major buyer, the emergence of "gasiyuan" is not a far-fetched dream.

Russia, Iran, and China combined produce more LNG than the United States, and they all have a non-dollar financial infrastructure. China has become the world's largest importer of LNG. For its part, Iran, which shares with Qatar the largest gas field in the world, operates on reviving its plan to export liquefied natural gas previously halted by sanctions, with the European Union trying to reduce its dependence on Russian gas as punishment for President Vladimir Putin's invasion of Ukraine.

Although China did not provide material support to Russia or help it evade Western sanctions, China's imports of liquefied natural gas from Russia doubled last February, and it can be said that the collective geoeconomic strength of China, Russia and Iran is much stronger than OPEC.

The writer believes that the high global demand for natural gas as a transitional fuel in the transition towards net zero emissions and the separation of gas prices from oil prices provide a sound overall condition for the emergence of gasyuan, however, it will not be easy for the yuan to quickly become the dominant currency and pose a real threat to the dominance of the dollar.

The lack of attractive yuan-denominated assets and desirable high-value goods and services exported from China prevents petroyuans or gazios from emerging any time soon, and China's addiction to current-account surpluses and a relatively closed capital account prevents Chinese government bonds from competing with US Treasuries.

Payments and Financial Correspondence

Another component of the financial system launched by China is the People's Bank of China's cross-border payments system backed by the digital yuan, which was launched in 2015 as a state-owned financial infrastructure that can allow sanctioned entities to enter global markets although Sanctions evasion was not the original motive for its creation.

The aim of the development of the cross-border interbank payment system was initially to promote the internationalization of the yuan, and this system is increasingly seen as China's alternative to the global banking system "SWIFT" even before some Russian banks were excluded from it, and the system of cross-border interbank payments combines the services of Financial messaging and settlement tasks in one platform, and it is the Chinese alternative to the "SWIFT + CHIPS" group, which transfers dollars through different institutions globally.

The writer indicates that conducting financial correspondence and completing internal settlements using this system would eliminate the risk of exposing transaction data to the United States, and thus cut off the flow of information that calls for sanctions, and the use of the yuan in settlements eliminates the dollar from transactions except for the need for the “Clearing” system. House Interbank Payments System ("CHIPS)" As it stands now, this system is limited in capacity and international coverage and now includes 76 direct participants, 64 of whom are in Asia, 8 in Europe and only one in North America.

The Bank of China cooperated with the SWIFT system to obtain domestic services that could theoretically ease sanctions, and launched a €10 million joint risk project with SWIFT called "Finance Gateway Information Services" in January 2021 shortly before both states imposed The United States, the European Union, the United Kingdom and Canada have imposed sanctions on several Chinese officials for human rights abuses against the Uighurs.

This project aims to establish a local network for financial correspondence services and establish a local data warehouse to store, monitor and analyze cross-border payment message information.

It is reported that the Cross-Border Interbank Payments System and the Digital Currency Research Institute of the Bank of China are contributors to the "Finance Gateway Information Services" project, and their presence indicates that the project is authorized to encourage the use of the digital yuan in cross-border transactions, and once it becomes a reality this can be another mechanism To control the damage if major Chinese banks are excluded from the SWIFT system.

One of the main approaches to China's defense strategy against Western containment is to build a commodity trading system based on the yuan (European News Agency)

coercive measures

Defensively, these measures are effective toward China's attempt to protect itself from the consequences of the US containment strategy, but in the worst-case scenario of a financial war triggered by an extreme event - such as a military clash over Taiwan - Beijing could implement two offensive retaliatory measures: disrupt global supply chains and restrict access As for studied disruptions in supply chains, it can take at least two forms: the application of the anti-sanction regulatory framework to limit access to the Chinese market, and the imposition of export controls on vital materials.

Since 2018, China has issued 5 legislation aimed at blocking the impact of US sanctions: the International Criminal Judicial Assistance Law, provisions for the list of unreliable entities, extraterritorial rules, the Law on Combating Foreign Sanctions, and the Export Control Law, which is the first Chinese law to establish a comprehensive system. And integrated export control regulation, as well as the State Council white paper on China's export control.

With the crystallization of the application of these laws, the Chinese government can compel foreign companies to choose between the Chinese market or the foreign market, while deterring and punishing cooperation in foreign actions that may pose a threat to Chinese national business and interests. Politics in China have a clear vision of how to strategically leverage China's influence in global supply chains to respond to foreign constraints and protect China's national interests.

According to the author, the export control framework could open up new scope for the Chinese government to limit exports of rare earth elements under the national security exception of WTO rules against restrictions on free trade, and the export control law could provide China with the legal basis for using national security concerns to reduce Exports of rare elements in the manufacture of high-tech consumer electronics and complex US weapons.

Of course, over-reliance on such coercive measures may lead to undesirable results. China does not have a monopoly on the elements themselves, which are not actually so scarce, but rather the chain of processing rare earth elements thanks to the costs and environmental concerns they cause, and in the event that Beijing’s threats cause The proposal is overwhelmed by the fact that the United States has the ability to act long before a crisis occurs, by creating its own alternative treatment chain.

The writer explains that China's emergence as a leading power in maritime trade provides another source of pressure in times of economic war, and Chinese port acquisitions give China greater control over global shipping flows that can restrict foreigners' ability to secure supply chains, and by 2019 China had Invested in 101 port projects worldwide.

In conclusion, all of these strategies carry their own risks, and while the administration of US President Joe Biden must seek to challenge and coexist with China through a strategy of “invest, match and compete,” it must resist either the temptation to overestimate China’s ability and demonize Beijing, or The naive rejection of China's ability to challenge US global leadership and the hegemony of the dollar.

Washington can sideline China's attempt to neutralize the geo-economic power of the United States by enhancing the attractiveness of American leadership and the attractiveness of the current world order. that.