Chinese Yuan posing takeover
At their recent summit in Uzbekistan, members of the Shanghai Cooperation Organisation (SCO)—a prominent regional organization led by China and Russia—agreed on a road map to expanding trade in local currencies. A road map for using local currencies in trade and developing alternative payment and settlement systems has been part of the SCO’s economic plan for years.
This agenda is in line with individual policies on the part of the group’s most prominent members, including Russia’s attempt to cushion the blow of Western sanctions, China’s deteriorating relations with the United States, India’s use of nondollar currencies in its trade with Russia, and Iran’s recent proposal for a single SCO currency. Chinese President Xi Jinping proposed to address development deficits through regional integration, especially by expanding the shares of local currency settlements, strengthening the development of local-currency cross-border payment and settlement systems, and promoting the establishment of an SCO Development Bank.
Xi did not openly discuss the geopolitical risk of U.S. dollar dependence when addressing the recent SCO summit. However, his proposal reflected Chinese leaders’ deep concerns about the vulnerability of the Chinese economy to U.S. dollar hegemony and their desire to develop alternative systems to hedge against the risk of the dollar’s dominance.
Beijing is not, for now, attempting to make the yuan an internationalized currency. It does not seek to dethrone the U.S. dollar and replace the dollar’s dominance in the global system with the yuan. Instead, it is taking steps to make the yuan a regionally powerful currency through local institutions in China and regional intergovernmental organizations such as the SCO. Beijing wants to increase the use of the yuan in China’s cross-border trade settlements and investment, reduce its dependence on the dollar, minimize exchange risk and dollar liquidity shortage, and maintain access to global markets during geopolitical crises.
China’s de-dollarization initiatives are not only implemented by the central government in Beijing. Some of the initiatives have also been carried out by local governments and local financial institutions. One example is the Sino-Russian Financial Alliance. In October 2015, China’s Harbin Bank (a city commercial bank) and Russia’s Sberbank (the largest savings bank in Russia by assets) initiated the Sino-Russian Financial Alliance as a nonprofit cross-border financial cooperation organization. The alliance’s primary goal is to establish an efficient mechanism to support Sino-Russian trade, facilitate comprehensive bilateral financial cooperation, and promote the use of local currencies in bilateral settlements. This financial alliance had 35 initial members, including 18 Chinese financial institutions (small and medium-sized banks, insurance companies, and trust investment companies) and 17 Russian institutions. When the alliance was launched, Sun Yao, vice governor of Heilongjiang province, said that the alliance “is an important platform to facilitate the development of the China-Mongolia-Russia Economic Corridor.”
Small Chinese banks that do not have much exposure to the dollar-based global financial system are natural entities to practice alternative payment and settlement mechanisms. By working with Russian entities, they will likely become fluent in implementing de-dollarization strategies to facilitate sanction evasions. Following U.S. sanctions against Russian financial institutions in response to Russia’s February invasion of Ukraine, Harbin Bank and Heilongjiang province do not seem to have been deterred by potential secondary sanctions. In May this year, Harbin Bank issued what it termed its “Hundred Measures” as an attempt to deliver Heilongjiang local party leaders’ ambition to advance financial opening up to Russia.
Systematically important Chinese banks, such as the Bank of China and the Industrial and Commercial Bank of China, immediately ceased processing transactions with Russian entities following the U.S. government’s announcement of sanctions against Russian banks. However, the small and medium-sized banks in the Sino-Russian Financial Alliance could help Russian entities evade sanctions using alternative payment and settlement infrastructures such as the Cross-Border Interbank Payment System (CIPS) or cash.
Harbin Bank is a good example. As a direct participant in China’s CIPS, Harbin Bank’s clearance and settlement network covers the entire territory of Russia, making it a strong candidate for serving as the hub for cross-border yuan settlements for Russian banks and companies. Supplying Russia with yuan in cash by not just airplanes but also trucks over land transportation is another mechanism that helps Russia evade sanctions. Such a mechanism has been developed and expanded by several small banks in Heilongjiang province since 2018. A local branch of Harbin Bank successfully delivered 15 million yuan (around $2 million) in cash to Russia’s Poltavka customs post in 2019.
Xi’s in-person presence at the SCO, despite China’s strict zero-COVID policy, suggests Beijing is preparing to hedge against further Western isolation by strengthening engagement with China-led regional blocs. Beijing counts on the SCO to provide some geoeconomic cushion for Beijing. In the past two decades, the SCO has quietly grown into a non-Western regional geoeconomic bloc that strives to gain a higher level of collective self-sufficiency and strengthen self-defense against global financial and geopolitical turmoil.