Daily Management Review

China Considers Its Alternatives In The Taiwan Dispute To Counteract US Sanctions


China Considers Its Alternatives In The Taiwan Dispute To Counteract US Sanctions
Researchers with ties to the Chinese government who are examining the Western response to Russia following its invasion of Ukraine claim that in a war with the United States over Taiwan, China would have to establish a worldwide network of businesses subject to American sanctions, seize American assets inside its borders, and issue bonds denominated in gold.
A Reuters review of more than 200 Chinese-language policy papers and academic articles published since February 2022 revealed that hundreds of Chinese economists, financiers, and geopolitical analysts have been investigating how China should mitigate extreme scenarios, including losing access to U.S. dollars, as a result of the sanctions against Moscow.
"In the context of intensified Sino-U.S. strategic competition and the Taiwan Strait conflict, we should be wary of the U.S. replicating this financial sanction model against China," wrote Chen Hongxiang, a researcher at a branch of the People's Bank of China (PBOC) in eastern Jiangsu province.
"Prepare for a rainy day" is how China should ensure its financial and economic stability, he said.
Many experts evaluating Russia's experience caution that a sanctions battle with the West might be even more damaging due to China's much larger economy, reliance on imports of commodities, and advanced foreign technology. Some reiterated their belief that raising interdependence rather than closing doors could be a wiser course of action.
According to senior U.S. military officials, People's Liberation Army leader Xi Jinping has given the army orders to get ready to invade Taiwan by 2027.
Although it has never disclosed specifics of its military plans, Beijing has not ruled out using force to seize the island.
But according to a review of China National Knowledge Infrastructure, the nation's largest database of academic literature, discussions about U.S. sanctions, including those from researchers within China's foreign and financial policy establishment, surged 50% in the 12 months after the start of the war in Ukraine compared with the corresponding period a year earlier.
"Analysing various possible scenarios and coming up with China's prevention, response and countermeasures are undoubtedly a top priority for China's policymakers," Yu Yongding, an economist and former central bank adviser, wrote in a journal article in July 2022.
In a response, the PBOC stated that the research papers its staff members wrote expressed their individual opinions. Concerns over the central bank's planning for sanctions were not answered.
Beijing's contingency preparedness was not addressed by the State Council Information Office of China.
Given China's more than $3 trillion in foreign exchange reserves and its export-dependent economy, Chinese experts were particularly concerned about the freezing of more than $300 billion in foreign currency assets held by the Russian central bank and the exclusion of Russian banks from the SWIFT interbank payments system last year.
"The risk that China's overseas reserve assets may be frozen seems more imminent," wrote Wang Yongli, general manager of China International Futures, one of the country's largest commodities and financial futures brokerage businesses.
In writings published, Wang and a number of PBOC researchers suggested that Beijing should freeze US investment and pension funds as well as take US company assets if the US imposed sanctions on China a la Russia. The documents did not list specific businesses as possible targets.
In addition, scholars have developed nontraditional remedies for China's reliance on the US dollar, some of which have been influenced by Moscow's strategies.
The China Centre for International Economic Exchanges (CCIEE), a Beijing-based organisation led by former trade ministers, has released multiple evaluations on what China may learn from Russia.
In a February post, CCIEE scholar Sun Xiaotao made the case that China should encourage more trade denominated in gold in order to prevent significant volatility in the value of the yuan. This decision is similar to the Russian central bank's decision to enhance its gold reserves by one million ounces since the start of the conflict in Ukraine.
The extent to which think tanks impact China's decision-making remains unclear, while they are known to brief and produce studies for high-ranking officials.
A few of China's policies are in line with the suggestions made in the papers. The PBOC raised its declared gold reserves for the eleventh consecutive month, according to central bank data released earlier in October.
Chinese experts have been prompted to consider Russia's response to Western pressure on its oil, gas, metals and chips industry, in addition to the financial penalties.
An academic at the Shanghai Academy of Social Sciences named Mou Lingzhi argued in January that China should promote yuan pricing of commodities like lithium, which is important for electric car batteries, faster in response to Russia's insistence that its natural gas be paid for in roubles.
Xia Fan, a researcher from a PBOC branch in the island province of Hainan, wrote in November that China should "accelerate the process of international energy settlement" in yuan to weaken the dollar's dominance in the oil market. Other central bank experts have repeated this viewpoint.
One of the top miners in the nation, China Minmetals Corporation, noted in a June report that emergency plans were required to ensure supplies of iron, copper, nickel, and other strategic metals. The company also mentioned that Russian nickel products had been removed from the London Metals Exchange due to the conflict in Ukraine.
In a tit-for-tat sanctions scenario, some scholars advocated for a new economic alliance that may shield China.
The less expensive Russian oil China has been able to import due to Western sanctions, according to a January letter from Ye Yan, an economist at China National Oil and Gas Exploration and Development Company, has created a model for a potential "anti-sanctions corporate network" that would enable member nations to exchange cheaper goods.
Researchers from China also proposed that Beijing take advantage of weaknesses in the European Union and between the United States and its allies. A foreign observer speculated that the West might not be united.
"Achieving broad international consensus for a sanctions coalition on China would be orders of magnitude harder than for Russia due to the much larger volume of investments there and reliance on its market," said Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics in Washington.
Certain commentators have pointed out the limitations of yuan internationalisation and suggested that China should strengthen its economic ties with the United States and its allies in order to mitigate the penalties.
In his 2022 paper, Yu—a former consultant to the People's Bank of China—wrote that it was improbable that the United States would take trillions of dollars or refuse to pay China's Treasury bills' principal and interest.
"Due to the close economic and financial ties between China and the United States, the United States will not do something like 'kill a thousand enemies and injure eight hundred of its own,'" Yu wrote.
Similar arguments were raised by Wang, the China International Futures official, last year, who pointed out that the hazards and expenses involved in transporting and storing significant amounts of gold made it impractical to replace dollar reserves.
Many experts recommend Beijing open up domestic financial markets more in light of these problems in order to bind the interests of the United States and its allies, as well as enterprises from these nations, with China and raise the costs of sanctions.
The EU and US have tried to derisk and diversify supply chains and on-shore chip production in part as a response to this. However, Chorzempa stated that it will take time for these policies to pay off.
"China's much more pronounced role in global value chains would also give it more opportunities for circumvention (of sanctions), and its ability to substitute foreign technology for indigenous production is far stronger than Russia's", he said.
After weighing the "nuclear" alternative of China being kicked out of SWIFT, PBOC researcher Chen decided that the best approach to protect China was to step up collaboration with the United States.
"The mutual penetration of the Chinese and American economies will inevitably weaken the willingness to impose financial sanctions," he wrote.