China regulators reportedly meet banks to discuss protecting assets from US sanctions
China is scrambling to find ways to protect its trillions of dollars in foreign assets from US-led sanctions similar to those imposed on Russia.
Economy
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Chinese regulators held an emergency meeting with domestic and foreign banks last month to discuss protecting trillions of dollars in overseas assets from US-led sanctions similar to those imposed on Russia, according to a report.
The Financial Times reports the April 22 meeting between representatives from China’s central bank and finance ministry, and executives from all large banks operating in China, was called because Chinese officials are worried similar action could be taken against Beijing in the event of a regional military conflict.
While the officials and attendees did not mention specific scenarios, according to the report, the most likely trigger for international sanctions is thought to be a Chinese invasion of Taiwan.
The Chinese Communist Party considers the democratic island nation of 24 million as part of China, and President Xi Jinping staked his legacy on “reunification” of the last surviving bastion of the 1949 civil war.
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“If China attacks Taiwan, decoupling of the Chinese and western economies will be far more severe than [decoupling with] Russia because China’s economic footprint touches every part of the world,” one of the people briefed on the meeting told the Financial Times.
Following Vladimir Putin’s invasion of Ukraine on February 24, Western countries led by the US imposed sweeping financial sanctions on Moscow, including cutting it off from the Swift interbank messaging network and seizing $US300 billion of Russia’s foreign currency reserves.
According to the Financial Times report, senior Chinese regulators asked bankers at the meeting what could be done to protect China’s overseas assets, especially its $US3.2 trillion in foreign reserves.
China holds more than $US1 trillion in US Treasury bonds and owns huge amounts of real estate, including major New York office buildings and hotels.
“No one on site could think of a good solution to the problem,” another person briefed on the meeting told the newspaper. “China’s banking system isn’t prepared for a freeze of its dollar assets or exclusion from the Swift messaging system as the US has done to Russia.”
Others at the meeting reportedly questioned whether the US could afford to cut economic ties with China, given its vast dollar-denominated holdings and close trade relationship between the two countries.
Michael Pettis, finance professor at Peking University, said the fact that the attendees were not able to come up with a solution “shows the extent to which China is locked into a structural problem”.
“As long as China runs large trade surpluses, it has no choice but to acquire foreign assets in exchange for the surpluses, and as long as it is incapable of rebalancing domestic demand, it has no choice but to run large trade surpluses,” he wrote on Twitter.
Prof Pettis noted it was interesting that, according to the report, when Chinese officials at the meeting were asked whether they could diversify into more yen or euro-backed assets, they replied that the idea was not practical.
“They are right. It isn’t practical because if China stops acquiring American assets and instead acquires Japanese or European assets, the resulting capital inflows into those countries would cause the huge American trade deficit to shift to those countries,” he said.
“Unlike the US, Japan and Europe are unable and unwilling to run the huge deficits that correspond to China’s surpluses. It is mainly the US (and the anglophone economies) that are willing to run the huge deficits that allow other rich countries and/or commodity exporters to run surpluses. This means that the US provides the mechanism which allows other countries to repress domestic demand.”
In order to keep this situation going, “the US must run permanent trade deficits and accept the unemployment or (more likely) soaring debt and asset bubbles that balance these deficits”.
“Europe and Japan, rightly, refuse to play this role. The US, weirdly, embraces it,” he said.
“Put another way, if the US stops countries like China, Germany, and Russia from recycling their export surpluses by acquiring American assets, these countries would have to choose between either exporting less or importing more American products.”
Mike Shedlock from SitkaPacific Capital Management said US President Joe Biden had sent an “unmistakeable message to China, Saudi Arabia, Russia, well actually everyone” that “we can make your fiat reserves worthless overnight”, to buy gold, base metals and “hoard things you have everyone needs”.
“But guess what happens if everyone starts hoarding things that others need?” he wrote.
“There is no practical measure China can take, but it can chip around the edges. It’s a complicated mess globally, for literally the entire world. I do not know when this explodes into a major currency crisis, but it will.”
Originally published as China regulators reportedly meet banks to discuss protecting assets from US sanctions
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