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China calculated a measure to ensure financial security to prevent the US from disconnecting from SWIFT


Chinese financial experts have begun to actively discuss the possibility that the world's second-largest economy will be disconnected from SWIFT (Global Telecommunication Association, specializing in money transfer and payment). After US President Donald Trump signed the Hong Kong Autonomous Act, creating money to impose sanctions on Chinese officials and financial entities.

Most experts believe that the prospect of US SWIFT embargo against China is less likely, but there is a growing voice in the country calling for the government to prepare contingency measures to connect key finance to the rest of the world without having to rely on SWIFT. 

Washington has not disclosed in detail which sanctions will be used against Chinese officials and financial institutions. But right now, China does not rule out the worst case. Some Chinese officials have begun to talk about the need to end their dependence on the dollar as soon as possible, along with promoting the internationalization of the renminbi. 

Fang Xinghai, vice chairman of the China Securities Supervisory Commission, was the first to warn about the risk of China being disconnected from the US dollar system and international payment network via SWIFT in case of US-China escalation.

Next, Director of the Supervisory Commission of the China Insurance Bank Guo Shuqing and former Chairman of the Chinese Communist Party Central Committee's External Relations Committee Zhou Li voiced his request to end the dependence on the USD. 

Today, most of China's international transactions are in USD. The yuan accounts for only 19% of China's total international payments in 2019. However, the use of China Inter-bank Interbank Payment System (CIPS) is still not very popular. For example, CIPS only handled about US $ 19.4 billion of transactions per day last year, while SWIFT's figure was $ 5,000 billion per day. 

In such a context, China would certainly have to take into account the potential consequences of disconnecting from the SWIFT system. Moreover, there is a precedent in the world. North Korea and Iran have been excluded from SWIFT, causing a major impact in the process of processing international trade and payment transactions with these two countries. 

Technically, SWIFT is a multilateral institution, headquartered in Belgium. But in fact, the United States shows a growing power of jurisdiction over SWIFT and uses this mechanism as a tool to enforce sanctions. That's why SWIFT is heavily influenced by the United States and that's why China is concerned about this system, said Xu Xuemei, a researcher at the Center for Economic and Development Studies at the China International Research Institute.

According to this expert, the US has repeatedly forced SWIFT to enforce sanctions against North Korea and Iran. As the most important part of international financial infrastructure, SWIFT cannot ignore the political and hegemonic elements of the USD.

SWIFT will therefore still be a mechanism for the US Salon to come to carry out financial sanctions. He analyzed that the SWIFT Chairman is a US representative, while the CEO is a European, such a mechanism cannot guarantee fairness and neutrality for SWIFT. 

However, from an institutional framework perspective, SWIFT is officially subject to European law, not the US. The problem is that the dollar is still too large in the global financial system. That is why SWIFT, like many other multilateral organizations, cannot ignore US ideas.

According to Shi Jiayou, a professor at the People's University of China Law School, the key task is to reduce the dependence on the US dollar and enhance the diversity of the global financial system. 

“Because most international transactions are tied to the dollar, SWIFT will not be able to escape its dependence on the United States. It is difficult to expect any real reforms for SWIFT in the current situation. We need to proactively promote the diversification of the global financial system, end the US dollar hegemony as soon as possible, along with promoting the internationalization of the yuan.”

Said Shi Jiayou.  

This expert acknowledged that China needs to develop CIPS further and promote the system in the world. Combine this process with the implementation of the Belt and Road Initiative (BRI), which encourages the use of the RMB in pricing and trading, at least with the countries participating in BRI. 

To end the dollar's hegemony in the global financial system, the most important thing is to set up new mechanisms for international payments. One of those mechanisms could be digital currency (a digital currency), a tool that enables instant cross-border payment transactions, without the need for a complex financial infrastructure along with corresponding banking system. 

The Central Bank of China (PBC) has over the years researched and developed the digital yuan. This cryptocurrency has been tested on a limited scale in four provinces and cities and is ready for large-scale circulation and circulation. 

According to PBC, the digital yuan will replace cash transactions and is also a constitutional currency like ordinary yuan. If this project is successful, China will be the first major financial power in the world to bring the national digital currency into circulation. It will open a new horizon for RMB internationalization. 

 

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