China and the Russia-Ukraine war

How China benefits from the ban of Russian banks from SWIFT

Commentators have praised the West’s banning of Russian banks from SWIFT as an effective sanction, but Andreas Nölke highlights how such sanction is actually benefiting the Chinese Cross-Border Interbank Payment System (CIPS) which not only contain an information system (like SWIFT), but also is a ready-to-use system for clearing and settling payments.

• Even though the volume of payments processed via CIPS is still limited (for example, compared to the U.S. domestic CHIPS), the number of connected participants is exploding, for example, from 195 in October 2015 to 1189 in May 2021. The current discussions on the correspondent banking system and SWIFT as a sanctioning tool against Russia will accelerate this process.
• There is also the issue of central bank digital currencies which bypass the banking system – and with it the system of correspondent banks and SWIFT. China plays a leading role on a global scale, especially with the rapid establishment of the digital renminbi.

Russia’s ban from SWIFT: an advantage for China
By: Andreas Nölke – Goethe University Frankfurt

Will China become collateral damage?

Currently China is battling many headwinds argues Adam Tooze:

• The option to develop an alliance with Russia has been explored since the 1990’s as it looked like a good option by adding strategic depth, and facilitating trade in raw materials and energy supplies. Given the huge swing in global public opinion against China in the wake of COVID, the last thing Beijing needs is to be associated with a blood soaked and repressive Putin.

• The mood in the stock market has significantly worsened by rumors of impending fines to be levied on leading Chinese tech firms and an alarming surge in Omicron cases in Shenzhen and Shanghai, the heart of China’s manufacturing economy.
• The COVID situation in Hong Kong is pretty bad setting a record for a surge in mortality. The situation on the mainland is only little better. Omicron poses an acute risk to the vulnerable, unvaccinated and immuno-naive elderly population of China.
• The tightening of US monetary policy will squeeze the entire global economy. In light of the recessionary tendencies inside China, it would be most unwelcome in Beijing.
• China’s financial centers are still heavily dependent on Japan. With the Fed expected to tighten monetary policy, Japanese banks must now make some tough decisions over what to do with the more than $5 trillion worth of overseas claims they have amassed. Do they cut back on risk and reduce their Eurodollar borrowing, charge a higher interest rate to borrowers, or become more selective in their lending?

Chartbook #99 China Under Pressure
By: Adam Tooze – Columbia University