• By The Financial District


A sharp escalation in tensions with the United States has stoked fears in China of a deepening financial war that could result in it being shut out of the global dollar system - a devastating prospect once considered far-fetched but now not impossible.

Chinese officials and economists have in recent months been unusually public in discussing worst-case scenarios under which China is blocked from dollar settlements, or Washington freezes or confiscates a portion of China’s huge US debt holdings, Samuel Shen, Winni Zhou and Kevin Yao wrote for Reuters.

Those concerns have galvanized some in Beijing to revive calls to bolster the yuan’s global clout as it looks to decrease reliance on the greenback. Some economists even float the idea of settling exports of China-made COVID-19 vaccines in yuan, and are looking to bypass dollar settlement with a digital version of the currency. “Yuan internationalization was a good-to-have. It’s now becoming a must-have,” said Shuang Ding, head of Greater China economic research at Standard Chartered and a former economist at the People’s Bank of China (PBOC.) The threat of Sino-US financial “decoupling” is becoming “clear and present,” Ding said.

Although a complete separation of the world’s two largest economies is unlikely, the Trump administration has been pushing for a partial decoupling in key areas related to trade, technology and financial activity. Washington has unleashed a barrage of actions penalizing China, including proposals to bar US listings of Chinese companies that fail to meet US accounting standards and bans on the Chinese-owned TikTok and WeChat apps. Further tension is expected in the run-up to US elections on Nov. 3. “A broad financial war has already started ... the most lethal tactics have yet to be used,” Yu Yongding, an economist at the state-backed Chinese Academy of Social Sciences (CASS) who previously advised the PBOC, told Reuters. Yu said the ultimate sanction would involve US seizures of China’s U.S. assets - Beijing holds over $1 trillion yuan in US government debt - which would be difficult to implement and a self-inflicted wound for Washington. But calling US leaders “extremists,” Yu said a decoupling is not impossible, so China should make preparations.