US financial sanction threats in response to Hong Kong, Xinjiang are a reality check for China’s global yuan ambitions

The US has threatened sanctions against individuals and banks linked to the Hong Kong national security law as well as over alleged crimes Xinjiang

China is still subject to the US dollar’s hegemony in international trade and payments despite efforts to reduce reliance on the US dollar in the last decade

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The US has threatened sanctions under the Hong Kong Autonomy Act in response to the national security law. Photo: AFP

Zhou Xin

Zhou Xin is Tech Editor of the Post, following stints as Political Economy Editor and Deputy China Editor.

Published: 6:30pm, 16 Jul 2020Updated: 6:30pm, 16 Jul 2020

Washington’s threats of financial sanctions against Chinese individuals who were involved in formulating the Hong Kong national security law and Chinese banks that do business with them, as well as officials and institutions that took part in alleged crimes in Xinjiang, has rung alarm bells in both Hong Kong and Beijing.

While the United States is unlikely to use the “nuclear option” of cutting Chinese banks off completely from the global US dollar payments system, at least for now, the reality of the threat lays bare for Beijing that, despite its efforts to reduce reliance on the US dollar in the last decade, China is still subject to the US dollar’s hegemony in international trade and payments.

If the US opts for modest punishment for Chinese officials, institutions and banks – as it did in punishing Russia for its annexation of Crimea – the damage to China would be minimal.

For instance, Chen Quanguo, the Xinjiang party secretary, may not have any foreign assets that could be seized under the Magnitsky Act sanctions, and many local Chinese banks have little or no international exposure to suffer from sanctions under the Hong Kong Autonomy Act. However, the broader picture is still chilling for Beijing.

Despite China’s huge diplomatic and financial efforts to boost the use of yuan in cross-border trade and payments, the results remain modest at best

More than 10 years after China’s former central bank governor, Zhou Xiaochuan, posed the idea of dethroning the US dollar in the international monetary system with a “super sovereign currency”, the hoped for “multipolarisation” in the world money system has made little, if any progress, with the US dollar remaining dominant in international payment and settlement.

Despite China’s huge diplomatic and financial efforts to boost the use of yuan in cross-border trade and payments, the results remain modest at best. The peak of China’s yuan internationalisation campaign came on October 1, 2016, when the Chinese currency was included in the basket of currencies underlying the Special Drawing Rights (SDR), an accounting unit of the International Monetary Fund, which has little practical use in the real world of trade or investment.

It gives the yuan nominal recognition as an “international” currency along with the US dollar, the euro, the British pound, and the Japanese yen. However, as former US Federal Reserve chairman Ben Bernanke noted, the inclusion of the yuan in SDR “confers no meaningful additional powers or privileges on China”.