…the freezing of over $300 billion in Russian central bank foreign currency assets and the exclusion of Russian banks from the SWIFT interbank payment system have raised alarm in China

Chinese government-affiliated researchers have explored potential strategies for China to navigate a conflict with the United States over Taiwan, drawing lessons from Western sanctions against Russia following its invasion of Ukraine. These researchers argue that if such a situation were to arise, China should establish a global network of companies shielded from U.S. sanctions, confiscate American assets within its borders, and issue gold-denominated bonds to insulate its economy from financial vulnerabilities.

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The study of these scenarios has been driven by concerns over the repercussions of heightened Sino-U.S. strategic competition, coupled with the Taiwan Strait conflict. Researchers have suggested that China, with its extensive economic ties and reliance on advanced foreign technology and commodity imports, could face more severe consequences than Russia did during its sanctions battle. Some experts propose fostering greater interdependence as a more effective strategy than isolation.

There have been reports that Chinese President Xi Jinping has ordered the People’s Liberation Army to prepare for a potential invasion of Taiwan by 2027, although Beijing has not disclosed specific war plans. Nonetheless, discussions regarding potential U.S. sanctions on China have surged, as indicated by a 50% increase in conversations among Chinese foreign and financial policy experts over the 12 months following the onset of the Ukraine conflict.

AIMING FOR MOSCOW

Chinese experts have expressed growing concerns about the safety of their country’s foreign exchange reserves, totaling more than $3 trillion, in light of recent actions taken against Russia. Last year, the freezing of over $300 billion in Russian central bank foreign currency assets and the exclusion of Russian banks from the SWIFT interbank payment system have raised alarm in China. Wang Yongli, the general manager of China International Futures, voiced his apprehension, suggesting that the risk of China’s overseas reserves being frozen appeared more imminent.

In response to this perceived threat, experts and researchers from the People’s Bank of China (PBOC) have proposed several strategies. These include freezing U.S. investment and pension funds, as well as seizing assets of U.S. companies, if the U.S. were to impose Russia-style sanctions on China. However, specific companies were not named as potential targets in the proposals.

In addition to these defensive measures, Chinese experts have explored ways to reduce dependence on the U.S. dollar, inspired by Russia’s strategies. The China Center for International Economic Exchanges (CCIEE) published analyses advocating for increased gold-denominated trade to stabilize the yuan, mirroring the Russian central bank’s actions of bolstering its gold reserves during the Ukraine conflict.

Although it remains unclear to what extent think tanks influence Chinese policymaking, some of their recommendations appear to align with China’s actions. For instance, the PBOC has consistently increased its official gold reserves for several months, demonstrating a commitment to diversifying its financial assets.

ASSOCIATIONS AND ENERGY

Amidst Western pressure on Russia’s oil, gas, metals, and chip industries, Chinese researchers have contemplated various strategic responses. Russia’s insistence on payment for natural gas in roubles has prompted Chinese scholars like Mou Lingzhi from the Shanghai Academy of Social Sciences to advocate for accelerating the global use of the yuan for pricing commodities like lithium, essential for electric vehicle batteries.

China Minmetals Corporation researchers have also stressed the need for emergency plans to secure essential metals like iron, copper, and nickel. They pointed out that Russian nickel products faced suspension from the London Metals Exchange due to the conflict in Ukraine.

Furthermore, there have been calls for the formation of a new economic alliance that could shield China from potential sanctions. Ye Yan, an economist at China National Oil and Gas Exploration and Development Company, proposed the creation of an “anti-sanctions corporate network” based on the model of cheaper Russian oil imports.

To exploit potential divisions within the Western world, Chinese researchers have suggested that Beijing take advantage of differences within the European Union and between the US and its allies. However, foreign analysts caution that forming a sanctions coalition against China would be significantly more challenging than doing so against Russia, given China’s larger investment volume and market reliance.

The shared theme among these Chinese researchers is the need for China to diversify its economic and strategic approaches in response to evolving geopolitical dynamics and global economic challenges.

Seeking Solutions to Sanctions

Some analysts argue that yuan internationalization has its limits and propose an alternative approach for China to counter sanctions by strengthening economic ties with the United States and its allies. In a 2022 paper, former PBOC adviser Yu expressed skepticism about the U.S. seizing China’s trillions of dollars or defaulting on Treasury bills, citing the close economic and financial connections between the two nations as a deterrent. He believed the U.S. would avoid causing harm to itself in the process.

Wang, an official at China International Futures, echoed this sentiment, emphasizing the impracticality of gold as a substitute for dollar reserves due to logistical and security concerns. To mitigate the impact of sanctions, many researchers recommend that Beijing further open its domestic financial markets, aligning the interests of the U.S., its allies, and their companies with China to raise the costs of sanctions.

In response, the EU and U.S. have pursued strategies to derisk and diversify supply chains and onshore chip production, though such efforts will take time to yield results. Chorzempa noted that China’s increasing role in global value chains offers more opportunities for sanctions circumvention, and its capacity to substitute foreign technology with domestic production surpasses that of Russia.

PBOC researcher Chen suggested that closer cooperation with the U.S. serves as the best shield against sanctions, as the interdependence of the Chinese and American economies reduces the willingness to impose financial restrictions, rendering it the “nuclear” option to avoid.

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