Chinese Banks Urged To Switch From SWIFT And Drop USD In Anticipation Of US Sanctions

Chinese Banks Urged To Switch From SWIFT And Drop USD In Anticipation Of US Sanctions by Tyler Durden for Zero Hedge

Even as the market does its best to ignore the unprecedented upheavals in US-Sino relations in everything from trade, to diplomacy, to financial relations, the truth is that there are tectonic shifts tearing apart decades of established norms between the two superpowers, and one doesn’t even have to dig too deep to see it.

Consider this: one month ago, we reported that Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, delivered a strong warning on the US currency, frontrunning Goldman by about a month in cautioning that the greenback’s reserve status may be ending.

Speaking at the Lujiazhui Forum in Shanghai, Guo made four points:

  • The Fed is the de facto central bank of the world. When its policy targets its own economy without considering the spillover effect, the Fed is “very likely to overdraft the credit of the dollar and the U.S.”
  • The pandemic may persist for a long period of time, and countries keep throwing money at the problem with a diminished impact. “It is recommended that you think twice and reserve some policy space for the future.”
  • There is no free lunch. Watch out for inflation.
  • Financial markets are disconnected from the real economy, and such distortions are “unprecedented.” It’s going to be “really painful,” when the policy withdrawal starts.

“Some people say: ‘Domestic debt is not debt, but external debt is debt. For the United States, even external debt is not debt. This seems to have been the case for quite some time in the past, but can it really last for a long time in the future?”

So what will China do? “China cherishes the conventional monetary and fiscal policies very much. We will not engage in flooding the system, nor will we engage in deficit monetization and negative interest rates.”

It’s not the first time China vented frustration against the “exorbitant privilege” of the dollar. After the financial crisis, then-PBOC Governor Zhou Xiaochuan proposed using the SDR to replace the dollar as the main reserve currency. For the most part these warnings were ignored, but one thing was clear: China is all too aware that the US is not only ready but also willing to weaponize the dollar and use it to its advantage in the recently launched cold with China.

So fast forward to today, when according to Reuters, a report from the investment banking unit of Bank of China warned that China should prepare for potential US sanctions by switching away from the Dollar-centric SWIFT system, and increasing use of its own financial messaging network for cross-border transactions in the mainland, Hong Kong and Macau.

According to the BOC report, which was co-authored by a former foreign exchange regulator, greater use of the Cross-Border Interbank Payment System (CIPS) instead of the Belgium based SWIFT system would also reduce exposure of China’s global payments data to the United States. The bank’s chief economist Guan Tao was previously a director of the international payments department of State Administration of Foreign Exchange (SAFE).

The report looked at potential measures the United States could take against Chinese banks, including cutting off their access to the SWIFT financial messaging service, the primary network used by banks globally to make financial transactions.

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