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May 4, 2022
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Sanctions against China – Mutual Assured Destruction

America provokes a big international conflict

A great resonance in the world was caused by the publication on May 1 in the British financial once (FT) titled “China Meets Banks to Discuss Asset Protection from US Sanctions” (China meets banks to discuss protection resources from US sanctions). The publication reports on the meeting held on April 22 in China. It was attended by officials from the People’s Bank of China and the Ministry of Finance of the PRC, Chinese and some foreign bankers working in China were invited to participate in the event. Of the foreign banks, HSBC was mentioned, the largest bank in the UK in terms of assets and market capitalization, which has a long history of work in the Middle Kingdom.

The meeting was kept secret for a whole week until, finally, some insiders of the British newspaper revealed a number of details.

The main issue discussed at the meeting was possible sanctions by Washington and its allies against China’s foreign assets, primarily its foreign exchange reserves. By analogy with how the collective West froze the foreign exchange assets of the Bank of Russia (they are the international reserves of the Russian Federation) in excess of $ 300 billion. Questions were raised about the likelihood of such actions in relation to the foreign exchange reserves of the PRC and about ways of early protection.

Taiwan was named the main detonator of a possible sanctions war against China. One gets the impression that America is deliberately provoking a major international conflict around Taiwan by supplying weapons to the island to defend against mainland China. Some experts who joined the discussion after the publication FThave suggested that Washington is teasing Beijing with its open support for Taiwan in order to provoke it into invading the island and then freezing China’s huge foreign exchange reserves.

The reserves are really gigantic. According to the State Monetary Administration of China (State Foreign Exchange Administration – SAFE), at the end of the first quarter of 2022, all international (gold and foreign exchange) reserves of China amounted to 3.373.2 billion dollars. Here are the main components of these reserves (billion dollars): foreign currency – 3.188.0; monetary gold – 121.6; special drawing rights (SDR) – 53.2; reserve position in the IMF – 10.5. So, the lion’s share of all reserves (94.5%) falls on foreign currency in the form of bank deposits, cash and securities denominated in foreign currencies. This, according to the IMF, is about a quarter of all foreign exchange reserves of the Fund’s member countries. Japan ranks second in terms of foreign exchange reserves, but it lags behind China by about three times.

China does not disclose the composition of its reserves by types of currencies and financial instruments, but all experts unanimously assert that most of China’s reserves are represented by securities of foreign issuers, and the US dollar prevails among currencies. By the way, one day, in July 2019, the State Monetary Administration of China (SAFE) announced that US dollar assets accounted for 58% of China’s total reserves at the end of 2014, up from 79% in 2005.

In the article FT interesting information is given, partly revealing the composition of China’s foreign exchange reserves. Usually, all authors refer to data from the US Treasury Department, which cites figures for long-term US treasury securities (bonds) as part of the international reserves of individual countries, including China. In the article FT the value of such securities in the portfolio of foreign exchange reserves of China at the end of the 1st quarter of this year is 1.064.5 billion dollars. However, the article says that in fact the portfolio of American securities in the composition of China’s international reserves exceeds one and a half times the mentioned amount. Other types of American securities from this portfolio are named (billion dollars): long-term bonds of federal agencies – 202.7; corporate bonds – 20.6; shares of American issuers – 294.8; short-term treasury papers – 4.2. Total securities – $522.3 billion in addition to long-term US Treasuries. And in total, in the composition of China’s international reserves of all securities of American origin, it accumulates in the amount of 1.586.8 billion dollars. It turns out 49.8% of all foreign exchange reserves of the PRC.

And if we assume that China still has reserves in the form of foreign currency on deposits in foreign banks in the amount of several hundred billion dollars, then most likely the share of the US dollar in international reserves is unlikely to have decreased compared to the one that was announced in the middle. 2019 (58%).

But back to the closed meeting of bankers in China. The monetary authorities of the Celestial Empire asked the participants of the event a question about possible ways to protect against a possible freeze (or even confiscation) of Chinese foreign exchange reserves. This question was raised by those present at the meeting. and Huiman (Yi Huiman), Chairman of the China Securities Regulatory Commission (China Securities Regulatory Commission – CSRC), I Xiao Gang (Xiao Gang), who led the CSRC from 2013 to 2016. An anonymous source for the paper said: “No one on the spot could come up with a good solution to the problem… China’s banking system is not ready to freeze its dollar assets or be excluded from the Swift messaging system, as the US did with Russia”. FT tried to find out the details by sending a request to HSBCbut the bank did not respond to the request.

Judging by some information leaks, the meeting assessed not only the risk of freezing China’s foreign exchange reserves, but also the likelihood of freezing (or even confiscation) of any foreign assets of China. As well as China’s ability to respond with counter-freezes (and confiscations) of foreign assets in the Chinese economy.

The threat of freezing and confiscation of China’s overseas assets is very real. This can be judged by the more than two-month campaign of arrests of foreign property (including financial assets) of Russian companies, banks and Russian oligarchs in Europe, the USA, Canada, as well as in offshore jurisdictions.

The scale of possible freezes (arrests, confiscations) of foreign Chinese assets cannot be compared with the scale of similar sanctions against foreign Russian assets. If we turn to the statistical tables of the international investment position of the Russian Federation and China, then the first part of these tables reveals the value and composition of the country’s foreign assets formed as a result of the export of private and state capital. The second part reveals the size and composition of foreign assets in the economy of a given country, formed as a result of the inflow of foreign capital. The difference between the value of foreign and foreign assets is called the country’s net investment position. In the table below, I have combined the data for the two countries for ease of comparison.

International investment position of the Russian Federation and China (billion dollars)

RF (at the end of 2021)

China (end of Q3 2021)

Net investment position

483.4

2.025.1

Foreign assets, total

1.648.2

9.056.6

Direct investments

487.1

2.468.5

Portfolio investments and derivative financial instruments

123.8

980.7

Other investments

406.7

2.234.4

Reserve assets

630.6

3.373.0

Foreign assets, total

1.164.7

7.031.4

Direct investments

609.6

3.422.3

Portfolio investments and derivative financial instruments

279.7

2,065.2

Other investments

275.5

1.543.9

Sources: data from the Bank of Russia and the State Monetary Administration of China.

As you can see, the value of all foreign assets of China exceeds that of Russia by 5.5 times. Including direct investments – 5.1 times; portfolio investments – 7.9 times; for other investments (credits and loans) – 5.5 times; for reserve assets (gold and foreign exchange reserves) – 5.4 times.

If China wages a sanctions war “to the last bullet” (i.e., counter-freezes and confiscations of foreign assets in the Chinese economy), the fight will end not in China’s favor. After all, his net investment position exceeds $2 trillion. China will be able to freeze foreign assets worth about 7 trillion. dollars, and the collective West – in the amount of about 9 trillion. Doll.

Even if the United States and its allies freeze or confiscate only that part of China’s foreign assets that belong to China’s official foreign exchange reserves, then further exchange of sanctions shots will no longer make any sense. Experts compare the blocking of Chinese foreign exchange reserves to pressing the button to launch a missile with a nuclear warhead. After such pressing, there will be no winners. This is understood in Beijing, this is understood in Washington. However, understanding does not guarantee that Washington will not press the button to block China’s foreign exchange reserves.

In the article we mentioned FT comments Andrew Colliera (Andrew Collier), managing director Orient Capital Research in Hong Kong. He says the Chinese government is rightly concerned “because it has very few alternatives, and the consequences [финансовых санкций США] catastrophic… It is difficult for the United States to impose massive sanctions against China. It will be like mutually assured destruction in a nuclear war.”.

Photo: REUTERS/Thomas White

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