The Dollar a ‘Sword’ Over China

The dollar is the weapon. China can’t survive as it does without it. And even if it convinces Iran to sell oil to them

in renminbi…do the Iranians even want renminbi? Maybe they can pay in gold bars?

On July 20, The Global Times, one of the bigger, English-language voices of the Chinese establishment,

wrote what may appear more like a message to its trading partners: the global trend toward “de-dollarization”

has already begun, wrote Wang Wen, professor and executive dean of the Chongyang Institute for

Financial Studies at Renmin University of China. The last piece of the “load-bearing wall”

of the “U.S. Empire State Building” has cracked, he says.

Here is the problem with that. Based on the SWIFT Renminbi tracker, China’s currency makes up less than 2% of global trade

and that number has held steady within about 10 basis points for at least the past three years. There is no boom in

demand for pricing iron ore from Australia in RMB, or Brazilian soy, or Chilean copper.

Hong Kong and China flags hang in the financial district of the city
Hong Kong and China flags hang in the financial district of the city

Even Russia, which has been on Washington’s blacklist since 2014, has not drastically reduced dollar holdings in its central bank reserves.

Gold is not even close to comparable in its weighting to the dollar at the Russian Central Bank.

China needs the dollar for now, and in a weird way, the U.S. might need China to need it. Blowing up Hong Kong banks would be a mess.

The recently-enacted Hong Kong Autonomy Act gives Trump the ability to enact sanctions against the leading Hong Kong banks.

The State Department has 90 days to designate individuals or banks, which if targeted would have one year to cease business relations with the U.S.

China does not want to see Hong Kong banks cut off from dollars, at least not yet. It is unclear if they are prepared for such a thing.

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As much as the Global Times may chest pound, such a move would be at the very least a negative sentiment

driver for Hong Kong’s financial services industry.

“It’s very much part of China’s interest to keep Hong Kong’s status and flow of dollars,” thinks Julia Hermann, senior global strategy analyst for Cartica Management.

“I don’t see any imminent risk of the Hong Kong losing its dollar peg.”

References

Forbes-Money