China's Ten-Year Struggle against U.S. Financial Power

China is a rising power that simultaneously faces the risk of confrontation with the U.S. hegemon and the risk of encirclement by wary neighbors. This structural situation has long shaped its international economic and financial strategies.

To deal with the United States, China has pursued a ten-year blunting strategy against U.S. financial power dating back to the global financial crisis, albeit with mixed success. It has supported monetary diversification, the creation of parallel interbank messaging systems, and bilateral swap agreements to gradually reduce its vulnerability to U.S. financial sanctions. To deal with its neighbors, China has pursued building strategies to enhance its financial leverage over them. It also has promoted the renminbi regionally—anchored primarily by trade flows but increasingly by the Belt and Road Initiative and attendant financial institutions and infrastructure investments—as a way to increase Chinese financial power in East Asia. And now China may have an opportunity to take its financial ambitions globally. With the issuance of its own digital currency, it may seek to ride a disruptive wave of financial innovation to simultaneously blunt U.S. financial advantages and build its own.

CHINA’S OBJECTION TO U.S. FINANCIAL POWER

Financial power is structural, allowing a state to shape the framework in which economic activity takes place and thereby change another state’s behavior. The dollar’s centrality to global finance has allowed Washington to turn foreign banks into instruments of U.S. policy and cut off Iran and North Korea from the global financial system, even though the United States has limited bilateral economic ties with both countries. Similarly, U.S. influence over global payments, sovereign credit ratings, arbitral bodies, and other institutions provides structural leverage.

China has long had objections to U.S. structural power in international finance. The reasons are likely not purely economic: a significant decline in the value of the dollar would in fact damage China’s exports and reduce the value of its enormous holdings of dollar-denominated assets.[1] Nor are they purely about national identity: China’s call for a reduced role for the dollar has not generally been accompanied by any chest-beating nationalist rhetoric about China’s status or even a greater role for the renminbi.

Instead, China’s concerns are motivated by the implications of U.S. structural power. For example, as the former president of the Export-Import Bank of China, Li Ruogu, has noted, the dollar’s power is dangerous to China: “the U.S. used this method [manipulation of the dollar] to topple Japan’s economy, and it wants to use this method to curb China’s development.”[2] Chinese leaders believe that they need to blunt and bypass this U.S. power, and Li has asserted that “only by eliminating the U.S. dollar’s monopolistic position” would it be possible to reform the international monetary system.[3]

Since the onset of the U.S.-China trade war, these concerns have become more acute. They increasingly point to the U.S.-Japan Plaza Accord as a cautionary tale of the ways U.S. financial advantages could harm China. And as Julian Gewirtz has noted, even mainstream Chinese economic and financial officials now regularly invoke concerns about “financial war” with the United States.[4]

BLUNTING U.S. FINANCIAL POWER

Although China’s concern over U.S. financial power has been long-standing, it was not until the 2008 global financial crisis that the Chinese leadership moved from decrying U.S. dollar hegemony to more confidently seeking ways to blunt it.

At the G-20 meeting in 2008, the first one called to coordinate a response to the crisis, President Hu Jintao asked the leaders of each country to “steadily promote the diversification of the international monetary system” away from the dollar.[5] China’s goal was not to replace the dollar with the renminbi but instead to bring about financial multipolarity. Indeed, just before the G-20 summit the next year, People’s Bank of China governor Zhou Xiaochuan specifically advocated for special drawing rights (SDR) as an alternative to the dollar-based system, arguing that the dollar’s reserve currency status “is a rare special case in history” and that “the crisis again calls for creative reform of the existing international monetary system.”[6] For the next several years, at major multilateral economic gatherings—including most G-20 summits, BRICS (Brazil, Russia, India, China, and South Africa) summits, and the G-8 + G-5 summit—President Hu or other high-level Chinese officials continued to call for reserve diversification, the SDR, and monetary reform, albeit it with no real success.[7] Roughly a decade later, the dollar’s position in global transactions remains mostly unchallenged.

The failure of these initial efforts to promote monetary diversification does not mean China has abandoned its quest to blunt U.S. financial power. Instead, it has at times sought to do so by targeting the substructure of U.S. financial influence, such as SWIFT (Society for Worldwide Interbank Financial Telecommunication). SWIFT is a Belgium-based standard-setting and messaging institution with a network that makes cross-border financial payments possible. The United States used its influence over SWIFT to cut off Iran (in 2012) and North Korea (in 2017) from the broader financial system, and it has made threats to do so against Russia and China.[8] China’s investments in an alternative are motivated in part by this possibility. Indeed, shortly after the West cut off Iran from SWIFT, the People’s Bank of China—with approval from the Chinese government—began developing its own alternative for financial messaging and interbank payments, taking it live roughly two years later.[9]

That system, now called the Cross-Border Interbank Payment System (CIPS), is not yet a true alternative to SWIFT. Whereas SWIFT focuses on messaging, CIPS focuses on clearance and settlement, and the two would at first glance appear complementary. And yet China is clearly investing in the ability for CIPS to act as a messaging system, allowing Beijing to bypass SWIFT entirely for interbank communications.[10] As Eswar Prasad argues, “China’s government is astute enough not to challenge SWIFT until the CIPS has matured, but no doubt one day the challenge will come.”[11] This possibility concerns executives at SWIFT, with the organization’s China head apparently trying to persuade CIPS not to invest in alternative messaging but to focus on clearance: “When we talked to CIPS, we said: ‘Why build your highway [i.e., messaging platform] if the highway exists already?”[12] The answer, evidently, is because doing so undercuts U.S. financial power.

In addition, China has also promoted the renminbi’s use in international trade to partially limit its vulnerability to U.S. financial sanctions. It has signed several dozen swap agreements of different varieties that facilitate the use of the Chinese currency overseas, a growing number of which are now tied to the Belt and Road Initiative. By 2015, China’s trade settlement in renminbi reached $1.1 trillion—30% of the country’s total trade—from virtually zero in 2000.[13] If this percentage increases, it partly reduces China’s vulnerability to U.S. structural power because the country will increasingly be able to settle trade in its own currency.

BUILDING CHINESE FINANCIAL POWER

Great powers have great currencies. Since the global financial crisis, China has sought to promote and internationalize the renminbi, in part to build its own financial power.

The effort has struggled at the global level. To promote the renminbi, China needs to adopt a high degree of capital account convertibility so that market participants know its value and can confidently move into and out of the currency as needed. China has proved unwilling to adopt convertibility because doing so would remove some of the Chinese Communist Party’s control over the domestic financial sector and could introduce volatility that might jeopardize social stability—and with it, the party’s rule.

China’s efforts to promote the renminbi without convertibility came to a halt in 2015 during the country’s stock market crash, which saw the government impose new restrictions to prevent capital outflows. These restrictions reduced the credibility of any future promises of partial convertibility and introduced a belief that the renminbi would continue to lose value. Data from SWIFT suggests that the renminbi still only accounts for between 1% and 2% of all international payments.[14] Meanwhile, as the trade war continues, Chinese economic officials are increasingly skeptical of moving toward liberalization, with former finance minister Lou Jiwei declaring that “internationalization of the yuan and full convertibility under the capital account…are not safe options” given the tensions.[15]

Although China’s currency has struggled at the global level, it is likely to find greater success in building financial power at the regional level. China has indeed sought to bolster the renminbi’s use within its home region and with commodity suppliers, which would give it leverage over other states. Throughout history, this has been common practice. France sought to establish a franc area to exclude Germany in the 1860s, Nazi Germany and imperial Japan extended their currencies in the twentieth century to gain structural power, and the United States also did so regionally and then globally following World War II.[16]

China appears to have taken a number of steps to boost its regional financial power. It has promoted the renminbi at the regional level through bilateral swaps, the Belt and Road Initiative, agreements with foreign central banks, and the use of Hong Kong as a hub for the currency—all measures short of full convertibility. By 2015, the renminbi constituted more than 30% of transactions between China and its Asian neighbors—up from only 7% three years earlier—which made it the main currency in regional trade with China, outstripping the dollar, the yen, and the euro.[17] As this percentage continues to grow, Asian states that wish to do business with China will increasingly need to settle in renminbi. At least within Asia, Beijing could wield some of the financial instruments that Washington wields today—with CIPS perhaps serving as China’s equivalent of SWIFT for regional economic statecraft. This could lay the foundation for Chinese financial influence under the broader U.S. global financial order.

DIGITAL DISRUPTION AND AN UNCERTAIN FINANCIAL FUTURE

Although U.S. financial hegemony is not directly imperiled by the renminbi, given its anemic internationalization, there are emerging questions about the implications of digital currency for the existing monetary order. Whether the disruptive potential of these technologies favors one power or another will increasingly factor into the ways that the United States and China attempt to cope with investments in and regulation of digital currencies and electronic payments.

For Washington, a central policy question is how to manage Facebook’s pursuit of its own digital currency, Libra. Evidently inspired by the way Chinese super apps like WeChat and Alipay have fused payments with other functions, Facebook now seeks to make its own app central to global payments through a digital currency accessible to its 2.4 billion users. To overcome the possibility that Washington might prohibit these efforts, Facebook has increasingly promoted its campaign by raising concerns about Chinese financial power. It has argued that a Chinese digital currency or the globalization of We Chat and Alipay—which have already conquered China’s domestic market—could undermine the U.S. dollar’s role. Meanwhile, among U.S. policymakers, there is a growing debate about whether to prohibit Libra, allow it, or instead offer an alternative digital currency from the U.S. Federal Reserve.

As Washington considers these questions, China is moving ahead. Chinese officials are increasingly concerned about the geopolitical implications of Libra. They fear that Facebook’s much wider userbase outside China would allow Libra to leapfrog WeChat and Alipay in international markets. Chinese officials are also worried about Libra’s potential to bolster the U.S. dollar system. Wang Xin, director of the People’s Bank of China’s research bureau, stated that “if the digital currency [Libra] is closely associated with the U.S. dollar….there would be in essence one boss, that is the U.S. dollar and the United States,” which would have geopolitical consequences.[18]

To prevent that outcome, Beijing has accelerated plans for its own digital currency, which would be rolled out by China’s central bank.[19] Major questions remain about how this currency might function, but the possibility that it could disrupt U.S. financial power if successfully implemented is real. Policymakers in Washington will need to think carefully about the implications of China’s new digital currency and the appropriate U.S. response.

CONCLUSION

China’s ten-year effort to blunt U.S. financial power is now merging with its hopes for building its own financial power. Although the position of the dollar benefits from the United States’ rule of law, strong institutions, and deep and liquid capital markets, there are ways that China could circumvent some aspects of U.S. financial leverage as well as promote its own currency at the regional level. By doing so, China could essentially craft its own financial order layered under the wider financial hegemony of the United States.

A key question is whether China’s still nascent regional financial influence will truly become global. While the country’s closed capital account has long stymied this, it is possible that technological progress may enable Beijing’s ambitions. Amid the uncertainty surrounding these developments, one element is clear: international finance is likely to grow into an even more contentious domain of strategic competition between the United States and China.

Rush Doshi is a Fellow and Director of the Brookings China Strategy Initiative and a Fellow at Yale Law School’s China Center. This commentary builds on the author’s chapter for Strategic Asia 2019: China’s Expanding Strategic Ambitions, published by the National Bureau of Asian Research (2019), and from his forthcoming book on Chinese grand strategy.

ENDNOTES

[1] Hongying Wang, “China and the International Monetary System: Does Beijing Really Want to Challenge the Dollar?” Foreign Affairs, December 19, 2017, https://www.foreignaffairs.com/articles/asia/2017-12-19/china-and-international-monetary-system.

[2] Jonathan Kirshner, “Regional Hegemony and an Emerging RMB Zone,” in The Great Wall of Money: Power and Politics in China’s International Monetary Relations, ed. Eric Helleiner and Jonathan Kirshner (Ithaca: Cornell University Press, 2014), 223.

[3] Quoted in Kirshner, “Regional Hegemony and an Emerging RMB Zone,” 223.

[4] Julian Gewirtz, “Look Out: Some Chinese Thinkers Are Girding for a ‘Financial War,'” Politico, December 17, 2019, https://www.politico.com/news/magazine/2019/12/17/look-out-some-chinese-thinkers-are-girding-for-a-financial-war-086610.

[5]  Hu Jintao, Hu Jintao wenxuan [Hu Jintao Selected Works], vol. 3 (Beijing: People’s Press, 2016), 139.

[6] Zhou Xiaochuan, “Reform the International Monetary System,” People’s Bank of China, March 23, 2009, http://www.china-un.org/eng/zt/g20_london_summit/t554938.htm.

[7] Hu, Hu Jintao wenxuan, 218; and Gregory Chin, “China’s Rising Monetary Power,” in Helleiner and Kirshner, The Great Wall of Money, 195–98.

[8] Zhenhua Lu, “U.S. House Committee Targets Major Chinese Banks’ Lifeline to North Korea,” South China Morning Post, September 13, 2017, https://www.scmp.com/news/china/policies-politics/article/2110914/us-house-committee-targets-major-chinese-banks-lifeline.

[9] Michelle Chen and Koh Gui Qing, “China’s International Payments System Ready, Could Launch by End-2015,” Reuters, March 9, 2015, http://www.reuters.com/article/2015/03/09/us-china-yuan-payments-exclusive-idUSKBN0M50BV20150309.

[10] Gabriel Wildau, “China Launch of Renminbi Payments System Reflects SWIFT Spying Concerns,” Financial Times, October 8, 2015, https://www.ft.com/content/84241292-66a1-11e5-a155-02b6f8af6a62.

[11] Eswar S. Prasad, Gaining Currency: The Rise of the Renminbi (Oxford: Oxford University Press, 2017), 116.

[12] Stefania Palma, “SWIFT Dips into China with CIPS,” Banker, July 1, 2016, https://www.thebanker.com/Global-Transaction-Banking/Swift-dips-into-China-with-CIPS.

[13] Prasad, Gaining Currency, 103.

[14] Huileng Tan, “China’s Currency Is Still Nowhere Near Overtaking the Dollar for Global Payments,” CNBC, February 2, 2018, https://www.cnbc.com/2018/02/02/china-currency-yuan-the-rmb-isnt-near-overtaking-the-us-dollar.html.

[15] Orange Wang, “China-U.S. Rivalry on Brink of Becoming a ‘Financial War,’ Former Minister Says,” South China Morning Post, November 9, 2019, https://www.scmp.com/economy/china-economy/article/3037039/china-us-rivalry-brink-becoming-financial-war-former-minister.

[16] Kirshner, “Regional Hegemony and an Emerging RMB Zone,” 215.

[17] James Kynge, “Renminbi Tops Currency Usage Table for China’s Trade with Asia,” Financial Times, May 27, 2015, https://www.ft.com/content/1e44915c-048d-11e5-adaf-00144feabdc0.

[18] Frank Tang, “Facebook’s Libra Forcing China to Step Up Plans for Its Own Cryptocurrency, Says Central Bank Official,” South China Morning Post, July 8, 2019, https://www.scmp.com/economy/china-economy/article/3017716/facebooks-libra-forcing-china-step-plans-its-own.

[19] Tang, “Facebook’s Libra Forcing China to Step Up Plans for Its Own Cryptocurrency.”