March 21, 2022 - 7:00am
Last week three US Senators issued a bill with a title for the ages:“Crippling Unhinged Russian Belligerence and Chinese Involvement in Putin’s Schemes Act”. The schemes that the act seeks to “cripple” are specifically the Russian use of China’s CIPS interbank payment system after America and her allies kicked the Russians out of our system, SWIFT.
Last month, I wrote a piece about how pushing Russia out of SWIFT would simply drive them onto Chinese payments platforms, thereby weakening SWIFT by making it less important globally. The bill seeks to prevent this by effectively extending these sanctions to any Chinese bank that interacts with Russian banks.
One immediately wonders where this ends. If the bill passes and Chinese banks are not allowed interact with American banks but continue to interact with, say, European banks, will these European banks be subject to sanctions too? It is hard to see why they wouldn’t given the internal logic of the approach. The logical endpoint of this type of sanctioning is likely America erecting a wall around its financial system. They are more than welcome to do this, but it seems like an imprudent policy.
But there’s a much more immediate problem: the Chinese currently hold around $1.065trn worth of US Treasury bonds — 11% or so of the total Treasury bonds in existence. If America wants to start an economic war with China, they had better be prepared for China retaliating by nuking the market for Treasuries and ultimately crashing the US dollar. At that point, China will probably not care if it is excluded from the American banking system, because the latter will be full of funny money. In such a scenario, it is likely that the rest of the world would start to move away from the American banking system — not to mention, extracting their money from the American stock and bond markets.
American sanction policy seems to rest on the premise that America remains the all powerful economic and financial superpower. It seems to have in mind America in 1965, at the height of the gold-backed Bretton Woods system. Today, however, America is still a superpower — but a grossly indebted one. The US dollar is powerful because it is in the interest of the US’s creditors — most specifically China — to keep it powerful.
America is risking enough of its financial credibility in its attempts to tame the Russian bear. If it simultaneously tries to overpower the Chinese tiger, I know where I’ll be putting my money — and it won’t be in US stocks or bonds. So a message to Sen. Rubio et. al: your unhinged scheme will only cripple yourselves.
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SubscribeThe Chinese will eventually attain plenty of champions and apologists in the West, as China’s reach extends ever wider. For example you will already come across people in scientific academia who will fight every attempt at any challenge by the West to China, because they are afraid the money pouring in to nudge institutions into pro-CCP lines, which they have rather got used to, might just dry up, not to mention those complimentary upgrades from standard to first class on the odd soujourn also drying up. And the indications already are several Tory MPs are close to ‘bought out’ by the CCP I would say.
Perhaps we are at the point where political writers, like financial advisors, should be required to declare any vested interests up front, so we can filter what they are saying through the correct lenses. Because many pieces these days sure as hell don’t make sense as independent stand alone investigations.
Does that include this piece ?
Please let us know.
Yep. Hallmarks of a pro-China line can be seen, even if somewhat soft-peddled.
I mostly disagree with you on situation in Ukraine, but your comments about Chinese capture of uk universities and financial institutions are on the money.
Very insightful…!
I would go as far as suggesting that there ought to be a pause of sorts in battling Russia, China or any of those other enemies of the West in the ”Great Game”. The biggest threat to the West, now at least, is Wokeism. Its all well and good to fight for freedom elsewhere. But one should perhaps safeguard it at home even more tenaciously.
Yes, Wokeism is a threat, but at the moment fighting Russian aggression of Ukraine is most immediate and important.
Your suggestion of pause suggest that you are Russian stooge.
True, the U.S. is grossly indebted (as many Western countries now are), but the Chinese economy isn’t doing too well either. Their housing/construction sector is in a crisis, demography isn’t doing them any favours, and COVID is a real threat. All in all the global economy seems pretty fragile.
It seems the logic is backwards, if China holds US money, the US can freeze it and cause trouble in China, which is using greater operational leverage and financial leverage. The US has big problems but it’s the cleanest dirty shirt so crises will tend to strengthen its currency as the Ukraine war has done.
For how much longer ?
In your view, debtors are more powerful than their creditors.
Which is news indeed.
Doesn’t it depend how much debt you have?
Exactly.
Anyone claiming that financial system arranged around Chinese interests is better than current one is deluded.
The author is correct this isn’t the time to start a economic war with China. The best time would have been twenty years ago. The second best time is now. Our attempt to change China by trade has failed all we have succeeded in doing is massively strengthening or enemy. Reducing their strength is going to be a painful and protracted process but the sooner we start the better.
“Painful and protracted.”
Impossible, in fact.
Like the bellicose senators, you suffer from the delusion that the West is still boss.
Why is it impossible?
That is what globalisers claim.
China was not relevant to the West even 20 years ago.
The only people who benefit from globalisation in the West are billionaires and their enablers.
Maybe 10% of people.
Yes,i accept that they control levers of power.
But surely even they don’t want to leave China dominated World to their children and grandchildren?
I don’t have kids, so I have no skin in the game.
Impossible actually means ‘impossible’, not politically and economically difficult.
Quite right. Whilst both Russia and China need to be dealt with now is the time to split them apart as far as possible rather than uniting them in common cause.
Need to be “dealt with” ?
Like a pupil being caned by an old-fashioned headmaster !
No, we’re the ones likely to be caned.
You seem to have a difficulty with the concept of taking action against our authoritarian / totalitarian enemies rather than appeasing them.
Great idea, I agree.
How do we achieve that great goal, though?
Any sensible government in Russia would see obvious dangers of aligning with China.
But gangsters running Russia do not act in long term interest of Russia.
What would be the price of persuading Russia to change sides?
Ukraine, Baltic States, Poland?
It didn’t work with Hitler, it will not work with Putin, sorry.
Jesus, the ‘Curb CIPS’ act. I swear they actually put more thought into the names of these bills than the content of them.
As if printing $5 trillion over the last couple of years is not enough to risk its financial credibility. But at least the U.S. debt to GDP ratio is still well below China’s 300%.
I’d like to know where the author will be putting his money?
Not a convincing article. Democratic and Autocratic contrasting values suggest now is precisely the time for an economic war with China. Putting it off is, I think, a far more terrifying option with the curtain-raiser currently being played in Eastern Europe.
Yeah, it’s always best to fight your most powerful enemies simultaneously !
Russia a most powerful economic enemy? Of?