The Digital Yuan & BSN Are On Track To Replace The US Dollar In China Trade

Moves To Limit Chinese Access To The US Dollar Will Bring Forward RMB Globalization 

Op/Ed by Chris Devonshire-Ellis

The United States has apparently ‘not ruled out’ US dollar focused sanctions against China concerning Washington’s unhappiness over the situation in Hong Kong, where it has removed special trade facilities.

Sanctions involving the use of the USD would mean suspending access by Chinese banks to the international SWIFT payment network. This is likely to be selective in terms of potential American legislation that would penalize banks for providing services to officials who implement the new national security law for Hong Kong, however a bill to do just this was passed by the US senate last week, although it has yet to be signed off by President Trump.

In response, the Chinese Government has stated that it is creating contingency plans. So what does all this mean?

US Dollar Weaponisation

Such actions are not new, in terms of the United States imposing such sanctions. Washington has done so before with both Russia and Iran. The initial effects were damaging to ordinary citizens, including relatives overseas such as Russian and Iranian students and retirees who were no longer able to receive living income or pensions made by their families. Internally, prices of certain basic commodities increased.

The issue with Iran and Russia is that in United States trade terms these are not significant markets. But blocking USD transactions with them also impacts upon nations friendly to the United States but whom also trade with these countries. That includes nations such as India – very much a massive emerging economy but whom will feel threatened themselves by such actions.

In the case of Russia, it is a relatively wealthy country and has land borders with twelve other nations, many of them on friendly terms and some already involved with free trade agreements with Russia via the CIS or the Eurasian Economic Union. Russia has little debt, and has been able to effectively replace USD use via bilaterally trading with other countries, including with India, China and Turkey among many others. Russia has already launched its SPFS Alternative Payments Network as a direct response to Washington clamping down on Russian market access to the USD.

Iran meanwhile is oil rich and has been able to trade both oil as well as gold reserves. It has bartered its way out of serious trouble, although there have been more serious impacts on Tehran in terms of purchasing maintenance equipment for aircraft and so on. However, it has also recently launched its own Cryptocurrency and is supporting this by mineral wealth.

Perhaps even more damaging though is not the immediate impact on these domestic economies. There have been hardships but not enough to bring about any regime or other changes that these sanctions were originally stated to be in place to push back against. More to the point is the fact that the United States in using the US dollar as a trade weapon is also encouraging other countries to look at alternatives.

USD In Global Trade Terms

In 2019, the USD held 44% of all transactions. The Euro was used in 16% of transactions and the Japanese Yen 8.5%, while the British Pound equated to 6.5%. The Chinese RMB reached about 2% and is still a globally minority player. This means that the dice are all stacked in favor of the USD, and to some extent the Euro. It should be noted that the RMB has overtaken the Euro in trade finance use, and that while the USD is the dominant currency in global transactions, the RMB is second globally in trade finance. An adjustment is taking place, and it is not purely being directed by the United States.

Things are changing. Of the 44% the United States holds, US-Euro trade accounted for 1/4 of the global total. But the emerging market currencies, which include the Chinese RMB actually grew in transactional volume by 20% in 2019, with the Chinese RMB being the most traded currency of this grouping, along with the Hong Kong Dollar, Indian Rupee, Indonesian Rupiah, South Korean Won and the Russian Ruble.

US-China Trade War Impact

The past two years US-China trade war issues have seen a drop in US-China trade as higher tariffs dissuaded the American purchase of Chinese goods. US imports from China dropped by US$87.3 billion in 2019 from 2018. This year will not see any improvement on that, and will probably decline again. This means three things: US-China bilateral trade is a declining market, the need for USD-RMB transactions is decreasing, and China has used this time to redirect supply chains elsewhere. It is significant that in the fist half of 2020, 30% of China’s total trade volume came from countries who have signed up to the Belt & Road Initiative.

USD Alternatives

China has already agreed currency swaps and to engage in the bilateral, non-US dollar denominated use of currencies with numerous countries and regions, including the EU, Russia, India, Iran and Turkey and has signed bilateral swap agreements with 35 other foreign banks.

These agreements are already in place; making adjustments to them to increase the amount of swaps is a negotiation issue but easier than starting from scratch. Other, similar agreements and deals are sure to be in the pipeline.

Payment Network Alternatives 

China has been working on this for a number of years, with networks such as Union Pay in common usage in many countries. The issue is de-linking this from the SWIFT payment network. China has been working with Russia and the BRICS nations over developing non-SWIFT use payment systems, with BRICSPay in particular being of interest as the BRICS nations are expected to account for 50% of all global trade by 2030 – just ten years away.

China’s Digital Currency Electronic Payment (DCEP) Project: The Digital RMB Yuan :

China is right now testing the use of a digital currency, the “Digital Yuan” and is running pilot schemes to see how it operates in Shenzhen, Suzhou and Chengdu, as well as the Xiong’an New Area near Beijing. These cities have a combined population of more than 38 million people. The Digital Yuan is being tested and used to subsidize transport in Suzhou, while in Xiong’an the trial primarily focuses on food and retail. The pilots’ aim in all locations is to “optimise and improve” functionality ahead of the wider roll-out of the currency. China will be the first major economy to use such a technology.

The PBOC, the country’s central bank, will be the sole issuer of the digital yuan, initially offering the digital money to commercial banks and other operators. The general public would be able to convert money in their bank accounts to the digital version and make deposits via electronic wallets, while the technology allows the digital currency to be exchanged without an internet connection. It can also be used to make contactless payments. The Chinese government is yet to confirm a proposed timeline for the rollout of the digital yuan, but numerous reports suggest a mid-2021 launch date. What can then be expected to happen is that China will encourage other nations to adopt this technology for their own currencies, and effectively create a new payments system, monitored by China, to manage cross-border transactions. That can be expected to happen sooner rather than later.

China’s Blockchain-Based Service Network 

Separately, China in late April this year – just three months back – made its Blockchain-based Service Network – or BSN – available for global commercial use. The BSN, led by the Chinese government-backed think tank State Information Center, is a global infrastructure that claims to help projects create and run new blockchain applications for a lower cost. There are obvious currency and financial transactional applications for this technology. With US third party banks taking a cut of every transaction that goes via the SWIFT network, China can be expected to undercut the United States service charges and present a fair accompli: a less expensive, yet more technically secure global payment transactions system.

Washington’s threats to China and the holding of a Damocles sword over banks in Hong Kong were preceded by the situation imposed upon Russia and Iran. Russia has been under sanctions since 2014. That situation hasn’t sat well with China, a major trading, political and neighboring power, and it has spent, along with Moscow, the past six years in both recognizing the USD risk and in developing alternatives. While President Trump can be expected to impose some form of sanctions on Hong Kong banks, they can be expected to be mild. However the cat is already out of the bag – China is and will continue to develop an alternative to USD trade and the SWIFT network. It is only a short matter of time before this is launched.

Related Reading

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