/ world today news/ As reported by the British The Guardian, China’s leadership has ordered comprehensive “stress tests” of the country’s financial system and key economic institutions. The aim is to determine their stability and possible performance in the event that Western countries impose large-scale sanctions similar to the current strike against Russia.
According to a source at The Guardian, “directly aware of the problem”, the stress tests started at the end of February – the beginning of March. Almost immediately after the announcement of the first ones “packages of unprecedented scale” from sanctions against Russia. A number of top Chinese government departments, from the banking regulator to those in charge of foreign trade, have been instructed to submit draft measures to be taken if China faces an equally significant campaign of sanctions from Western economies.
According to the source, the PRC leadership did not explain the reasons for the unprecedented-scale inspection. It’s official “natural reaction” from Beijing due to the close nature of Sino-Russian cooperation in recent years. A “second source” who “wishes to remain anonymous” said Chinese diplomats have also held meetings with experts over the past few weeks to formulate an understanding of possible developments in the Ukraine conflict.
Tong Zhao, a senior fellow at the Carnegie Center in Beijing, said in an interview with The Guardian that from the perspective of the Chinese leadership, since the US-led Western coalition is taking such harsh measures against Russia, they could do the same to Beijing.
Therefore, it is necessary to establish how resistant China’s financial and economic sphere is to external pressure. According to Zhao, the current stress tests are an attempt by China to understand what the short-term consequences could be if Beijing continues to cooperate with Russia. According to Zhao, the scope of the sanctions imposed by the West against Moscow caused some surprise among the Chinese leadership.
Another reason Beijing is testing the stability of its economy and financial system, according to Western media, is possible preparation for “attack on Taiwan”. The Chinese leadership categorically states that there is no connection between the events surrounding Ukraine and the “Taiwan issue”.
Beijing considers the island, which declared independence from mainland China in 1949, as one of its provinces. Officially, Washington supports the “One China” principle. However, the US declared China to be “the main threat” for the entire Indo-Pacific region.
Taiwan, for its part, is seen as “instrument of containment”. Because of this, American weapons are regularly supplied to Taipei. Beijing views the US actions as provocative and says that “the Taiwan issue does not tolerate outside interference.” At the same time, the actions of the United States in this case are very similar to those with the help of which the anti-Russian hysteria and aggression were fanned in Ukraine.
As noted by RBC, in early May, China conducted another military exercise in the areas adjacent to Taiwan’s borders. The exercises, which took place from May 6 to 8, involved “navy, air force and standing army contingent’. According to Federation Council member Alexey Pushkov, China is acting in a broader context, “preparing for a highly conflictual 21st century.” At the same time, “the source of the conflict is obvious, ‘and it is not in the East'”.
According to Edward Fishman, former economic sanctions adviser to John Kerry when the latter was head of the State Department, “no country, including China, is immune from the kinds of financial sanctions the West is currently using against Russia.” According to Fishman, the Western financial system “no good alternative” and this state of affairs “it will continue for a long time to come”.
The British The Economist refers to the opinions of experts who are convinced that the US and its allies have serious opportunities to inflict financial damage on China. Eswar Prasad of Cornell University estimates that Beijing is holding “to two-thirds” of its $3.2 trillion in foreign exchange reserves. US dollars, in government bonds and other assets of the leading Western countries.
If America and Europe stop financial transactions with China, China may lose access to the dollar, the euro and the British pound. But this will provoke a serious global crisis. And if the West is already facing serious economic problems after the sanctions against Russia, then an attack on China will lead to a catastrophe for the world economy.
As reported by the Financial Times, on April 22, representatives of China’s central bank and Ministry of Finance held a meeting with heads of domestic and foreign banking structures. It was about China’s ability to protect its foreign assets in case Western countries impose sanctions on China similar to the current anti-Russian ones.
According to the interlocutors of The Economist, the blocking of assets will not allow Beijing to sell reserves and thus deal a blow to the financial systems of America and Europe. In turn, according to Western experts, if the PRC “attack Taiwan” this will only encourage private investors around the world to buy government securities of leading western countries such as “protected asset”.
At the same time, China will also have “what to answer with”. Beijing, for example, can seize assets of foreign investors comparable in volume to its own gold reserves invested in the Chinese economy. According to the Washington-based Center for Strategic and International Studies, Western direct investment in China will reach $3.6 trillion at the end of 2021. dollars, and the amount of “portfolio” investments, including stocks and bonds, is about 2.2 trillion. dollar.
In turn, Western sanctions against China’s commercial financial institutions would pose a significant threat to the banking structures of America and Europe. According to the Financial Stability Board, four Chinese banks are among the 30 most systemically important global financial institutions.
A strike on these banks would cause significant damage to their Western counterparts – creditors and holders of correspondent accounts. The importance of China’s banking system is now so great that the West cannot guarantee financial stability at home if significant sanctions are applied against Chinese banks.
And what about the escalation of the trade war? During the Trump era, Washington has repeatedly stated its intention to give “worthy answer” on “the strengthening of China” in all directions. The US resorted to escalating the trade war with Beijing, and the struggle between the world’s two leading countries began to spread in almost all areas, from international trade and economic diplomacy to the confrontation of information narratives.
Even the trade agreement signed in the winter of 2020 did not fundamentally change the situation. The onset of the coronavirus pandemic has made China the primary target of information attacks from Washington. The Chinese leadership accepted the challenge and successfully met it.
At the same time, Fishman believes, the economic conflict between the West and the PRC will most likely not be as large-scale as the current clash between the West and Russia. The West and China will necessarily vie for advantage over each other in just a number of key, strategic areas: from advanced technology to next-generation infrastructure. There will be no talk of an attempt to inflict a crushing defeat on the economic development of the enemy.
The blow to China’s foreign trade will at the same time be a blow to the entire world trade, The Economist is sure. China is now a leading trading partner for more than 120 countries around the world. Severing trade ties with Beijing due to sanctions imposed by the West will turn most countries against the Americans and Europeans.
The West itself will also suffer greatly, which will certainly undermine its unity and resolve. China’s share in US imports is 18 percent, and in EU imports – as much as 22 percent. Parts and materials sourced from China are critical to the production of many products in America and Europe.
Sanctions against Chinese enterprises will significantly damage the domestic production of Western countries and undermine their exports. If the US and its allies cut their imports from China by 90 percent, their own exports would drop by at least 10 percent, according to experts at the Vienna University of Economics and Business.
Many Western companies are critically dependent on access to China’s domestic market, the world’s largest. For example, the Boston Consulting Group estimates that a complete ban on semiconductor shipments from China would cost American firms 37 percent of their revenue and put up to 120,000 workers at risk of layoffs. And Europe’s luxury goods industry earns up to €50 billion a year in China, which it stands to lose if sanctions similar to those against Russia are imposed.
The situation in the US economy, Beijing’s third largest trading partner after the EU and ASEAN, is becoming increasingly tense. Inflation reached its highest levels in the last 40 years. The US Federal Reserve recently conducted “the most significant of the last 20 years” rate hike and also announced plans to start selling assets from its balance sheet in the near future. However, many experts still fear that the American regulator or “underestimates” inflation risks. Or, on the contrary, starting “crusade” against inflation, he could send the US economy into recession with his actions.
The consequences for the PRC in the current situation could be multi-directional. Rising inflation directly threatens the security of Chinese investments in American assets, which, let’s recall, are trillions of dollars, as it causes them to depreciate year by year by huge amounts.
At the same time, if the Fed gets serious about inflation and tightens monetary policy “to the max,” then commodity market prices will at some point begin to decline. This will ease the situation for the Chinese economy, which imports a lot of raw materials.
At the same time, America’s recession, feared by a growing number of observers, is in a state of “by itself‘ to seriously undermine Chinese exports. And through it – the stability of the Chinese economy as a whole.
In a similar situation of rising inflation in the late 1970s and early 1980s, the United States “rescued” by a sharp rise in interest rates. However, this policy led to the bankruptcy of a number of developing countries whose loans were denominated in dollars.
These days, many countries whose economies are vulnerable to rising US interest rates are heavily indebted to China. Difficulties in paying debts, especially the bankruptcy of such countries, could negatively affect the state of Chinese finances. On the other hand, the strengthening of the dollar against the yuan, due to higher interest rates in the US, will increase the competitiveness of Chinese exports.
The financial and economic symbiosis with China is very beneficial to many in the West. Nevertheless, the geopolitical struggle of the Western countries against China is developing – albeit slowly, but steadily. And while the West vacillates between looking for a pretext for escalation and reasons to “postpone” it, China’s leadership has demonstrated its determination to make the most of the remaining time.
Translation: ES
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