Chinese policymakers are increasingly convinced that the United States is determined to implement a full-fledged strategy of containment against China, reports the Business Standard.
Beijing views the Indo-Pacific Economic Framework for Prosperity as the economic mirror of the Quadrilateral Security Dialogue and AUKUS, two US-led security pacts that Beijing regards as anti-China coalitions.
Prepare for the worst but strive for the best
Chinese officials, academics, and media rhetoric increasingly talk of self-reliance and are preparing for a forced decoupling from the United States. Fang Xinghai, a vice chairman of the China Securities Regulatory Commission, proposed accelerating the yuan’s internationalization to prepare for the risk of forced financial decoupling. A Shanghai-based academic argued that “the peace dividend is over“—hence, “it is time that China prepares for a full decoupling.” Even the more moderate voices have acknowledged the profound changes in US-China relations behind the “decoupling theory” and called for China to “prepare for the worst but strive for the best.”
While part of the likely response will be the further strengthening of China’s military, the party-state will also tighten two economic strings in its bow. It will double down on pursuing a preexisting self-reliance strategy and sanction-proof the Chinese economy while bolstering its offensive geoeconomic capabilities by reinforcing China’s strategic position in global supply chains and expanding its influence in international commercial sea lanes.
The Chinese Communist Party (CCP) made “independence and self-reliance” the centerpiece of its 2021 historic resolution. The West’s recent harsh sanctions on Russia have reminded Chinese leaders of the need to strengthen economic autonomy. On Feb. 25, the day after Russia’s invasion of Ukraine, a People’s Daily editorial argued that “independence and self-reliance ensure that the cause of the party and the people will continue to move from victory to victory.” The government recently vowed to improve self-reliance by building a “national unified market.” Policymakers are looking to prepare the Chinese economy to withstand the heavy economic blow caused by a forced decoupling.
These concerns are not new. Chinese policymakers have been advocating reforming the global financial system since immediately after the Asian financial crisis at the end of the 1990s, seeking to hedge against US dollar hegemony. In 1999, Dai Xianglong, then-governor of the People’s Bank of China (PBOC), argued that the existing global financial system “needs to be reformed” because “the role of international reserve currency played by a few countries’ national currency has been a major source of instability.”
Yuan-based global commodities trading system
One major component of China’s defensive strategy against perceived Western containment is building a yuan-based global commodities trading system, in an effort to improve the yuan’s pricing power, reduce China’s vulnerability in the global resources trade, and strengthen China’s global financial position. Major Chinese oil suppliers, such as Russia, Angola, Venezuela, Iran, and Nigeria, now accept yuan in their oil trade with China.
The Shanghai International Energy Exchange launched the yuan-based Shanghai crude oil futures in 2018, and in April 2021, the total trade volume of the yuan-valued oil futures reached 44 trillion yuan ($6.7 trillion), with clients from 23 countries and regions. Oil exporters could convert their yuan oil revenue into gold on the Shanghai and Hong Kong gold exchanges. This interconvertibility implies that China, the world’s largest oil importer, has a complete domestic infrastructure for indirectly trading oil using gold. This marks the beginning of pricing alternatives for a major global commodity.
China could capitalize on the current energy transition to cultivate a “gas-yuan,” emulating the petrodollar. Just as oil-producing countries depend on dollar revenues that aren’t freely spendable elsewhere, gas-producing ones such as Russia and Iran could be dependent on the yuan. In China’s 2017 World Energy Development Report, Chinese scholars proposed the concept of gas-yuan. Given the fragmented nature of global natural gas markets and China’s leverage as a leading buyer, the emergence of a gas-yuan is not a pipe dream.
China’s LNG imports from Russia double
Russia, Iran, and China collectively produce more liquefied natural gas (LNG) than the United States, and they all have non-dollar financial infrastructure in place. China has become the world’s largest LNG importer. Iran, which shares the world’s biggest gas field with Qatar, is reviving its previously sanction-stalled LNG export plan as the European Union attempts to cut its dependence on Russian gas as a punishment for President Vladimir Putin’s invasion of Ukraine. Although China has not provided material support to Russia or bluntly helped Russia dodge Western sanctions, China’s LNG imports from Russia doubled in February. The collective revisionist geoeconomic power of China, Russia, and Iran arguably is much stronger than that of the OPEC.
Higher global demand for natural gas as a transition fuel in the move toward net-zero emissions and the decoupling of gas prices from oil prices also provide a benign macro condition for the emergence of a gas-yuan. However, it would not be easy for the yuan to quickly achieve the status of a dominant currency and pose a credible threat to the dollar hegemony. The lack of attractive yuan-denominated assets and the lack of desirable high-value goods and services exported from China preclude the rise of a petroyuan—or gas-yuan—anytime soon. China’s addiction to current account surplus and relatively closed capital account also prevents Chinese government bonds from rivaling US Treasurys.
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Source: The Business Standard
