US sanctions threat if China aids Russia stirs fear in Beijing about forex assets

US punishment of Beijing for supporting Russia could target China’s large foreign reserve assets, economists say

Because China runs a trade surplus, it has to invest in foreign assets and there are few other choices but US bonds

4-MIN READ4-MIN

99+

Potential Western sanctions on China for its support of Russia could hurt its foreign securities holdings. Photo: Reuters

Published: 4:30am, 7 Apr 2022Updated: 5:14am, 7 Apr 2022

Washington’s financial sanctions on Russia for invading Ukraine have raised concern in China over its large exposure to US government bonds, although experts say there is no real alternative for the country to invest its foreign exchange reserves.

In recent weeks, former central bank adviser Yu Yongding and former vice-chairman of the Bank of China, Wang Yongli, have issued warnings about the effect that Western sanctions could have on China’s investment in foreign securities, amid US threats of “consequences” if Beijing helps Russia evade sanctions.

“If China also encounters similar sanctions against Russia, its overseas assets may even face the danger of turning to zero,” said Yu, a prominent Chinese economist, in a blog post last week.

Russia’s invasion of Ukraine on February 24 triggered a barrage of sanctions from the US and its allies that have included removing some Russian banks from the international financial messaging system Swift, which is used to transfer money across borders.

The foreign currency reserves of Russia’s central bank have also been frozen, causing the rouble to plunge more than 20 per cent initially, though the currency has since stabilised after Russia imposed harsh capital controls to prevent outflows.

A country like China that runs a trade surplus has to invest in foreign assets and there are few other choices but US bonds, said Michael Pettis, a professor of finance at Peking University and a veteran China observer.

“By implementing the sanctions, Washington has shown that control over the global payment system gives it an enormous amount of power,” he said. “Countries like China, Iran, Russia and Venezuela who are very concerned with the exercise of that power now have a greater incentive to hold something other than the dollar. But that’s all it is … what else can they hold?”