As tensions between two of the world's largest economies continue to escalate, China is now considering the possibility of decoupling its currency from the US dollar. A former senior Chinese diplomat has proposed the idea of disconnecting the country's currency from the US dollar in case things get from bad to worse in the coming months and years.
Former deputy director of the Communist Party's International Liaison Department, Zhou Li, is calling on the Chinese government to at least prepare a plan in case the trade dispute transforms into a full-blown financial war. Zhou, which had headed the agency that was responsible for managing China's relations with political and commercial elites, is the latest public figure to call on China to prepare for a worst-case scenario.
In an article published on Saturday, Zhou noted that the US could very well leverage the global monopoly of its currency to place financial pressure on China. Such an action could threaten China's further development if the situation were to get worse. Zhou called on officials to prepare plans to insulate China from such an event and to ensure that its financial systems are not placed in jeopardy.
Zhou's warnings come just days after the US Congress had passed a new law as retaliation for China's imposition of its new national security law in Hong Kong. The Hong Kong Autonomy Act, which was approved last week, aims to sanction local and foreign individuals and financial institutions that are deemed by the State Department as being involved in the subversion of Hong Kong's autonomy. Under the law, the punishment could include denial of access to the global US dollar payment system.
Apart from the controversial law passed by the US, Zhou pointed out that China could soon be pressured by the US to adhere to its policies by leveraging the global influence of its currency. The former official, who is a member of the national committee of the Chinese People's Political Consultative Conference (CPPCC), noted that the US had already used this tactic on Russia and Iran by leveraging the dollar-dominated SWIFT payments messaging system to push its own agenda.
Zhou concluded in his article that China should accelerate the development of yuan-based cross-border payments and clearing systems. The country should also continue to push the internationalization of its currency in case the US decides to "weaponize" its currency. By establishing its own local currency settlement mechanisms, the country can slowly decrease its dependence on US dollar-denominated systems to offset potential external financial pressures.
