US sanctions and the RMB

CHINA ADVISORY - Report 10 Jul 2020 by Andrew Collier

Reuters has reported that the Chinese banks are considering alternatives to the US dollar in case the US imposes sanctions on the banks for their support of the National Security Law in Hong Kong. As Reuters noted in an article posted on July 10:

"In worst-case scenarios under consideration by the Bank of China, and Industrial and Commercial Bank of China, the lenders are looking at the possibility of being cut off from U.S. dollars or losing access to U.S. dollar settlements, two sources said. The dollar is the dominant global currency for international payments and central bank reserves. 'We are hoping for the best, but preparing for the worst. You never know how things will turn out,' one of the sources said."

We think a cutoff from the USD or from the use of SWIFT is unlikely for a number of reasons. Such a move would not only threaten Chinese USD assets in the US, including Treasuries, but would also put in doubt the safety of the dollar. Nor is there much the Chinese side can do to sidestep the US dollar. Thus, we are likely to see more currency “skirmishes” through targeted actions than an actual currency war.

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