By Maximilian G. Mooradian
The United States has led the international economic order for the last seventy-eight years, with only the Soviet Union posing a serious challenge. However, China is starting to pose a severe threat to the United States by trying to replace the US dollar as the world reserve currency. According to the International Monetary Fund, the Chinese yuan is the third-largest trade financing currency and the fifth-largest payment currency, and is a special drawing rights currency with foreign investors demanding an increase in renminbi internationalization.
At a recent Shanghai Cooperation Organization summit, Chinese President Xi Jinping’s new proposal discussed the vulnerability of China’s economy to the dollar and how he wishes to create a new system that reduces the dollar’s global influence. Xi Jinping aims to position China at the helm of a worldwide economic order, shielded from the dollar’s impact regarding sanctions and the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system. SWIFT was founded in 1973 as a global provider that connects around 11,000 banks and is used by more than 200 nations. SWIFT has a virtual monopoly over the world’s financial exchanges, and it is almost impossible to conduct business without them. However, Xi plans to out-compete the US-led SWIFT through the China-led Cross-Border Interbank Payment System (CIPS) organization and the Russian-led System for Transfer of Financial Messages (SPFS), proving to be a formidable rival to the United States in their conquest to reshape geoeconomics and geopolitics.
The Impact of Russia’s War in Ukraine on the Chinese Yuan
China’s currency received much attention when the war in Ukraine began in 2022. Due to Russia’s invasion, the United States and NATO imposed heavy sanctions that banned Russian banks from using the SWIFT international banking system, making it impossible for other banks to do business with Russia. These sanctions also froze Russian assets held abroad and halted cross-border payments. Seeing an opportunity to seize Russian business that SWIFT lost, China offered to help Russia’s faltering economy and economic isolation by agreeing to increase the exchange of yuan-ruble trade. This allows China to increase its economic influence, helps keep the Russian economy afloat, and removes the dollar from involvement in the countries’ mutually beneficial economic partnership.
In February 2022, the value of their yuan-ruble trade volume totaled about 2.2 billion yuan, which increased to 201 billion yuan by the end of the year. In the first eight months of 2023, bilateral trade volume rose by 32 percent, with total trade volume reaching $155 billion, according to Chinese customs data. During a meeting between Russian President Vladimir Putin and Xi at the 2022 Beijing Olympics, the two sides pledged to boost bilateral trade to $250 billion by 2024. The increased trade between the two nations will focus on a Russian trade surplus that exports oil, gas, coal, and vital minerals essential to manufacturing semiconductors in China. China’s actions aim to increase its global economic influence at the cost of possibly prolonging the war in Ukraine. The continuation of the war in Ukraine serves Beijing’s interests in gaining leverage over Russia as its primary trading partner, which will shift the balance of power in China’s favor the longer the conflict continues.
The Chinese Alternative
China has been trying for years to create an alternative method to SWIFT, and CIPS has been the best attempt so far. The idea for creating this system was proposed in 2009, initially focusing on increasing trade. In 2015, it was launched to provide an alternative international payment system that relied on China’s yuan, connecting onshore and offshore accounts with participating banks, which can subvert US sanctions since they do not rely on the dollar for transactions. The idea of de-dollarization is a prevalent concept to China and its allies, and as of January 2022, CIPS claimed to serve around 1,280 financial institutions in 103 countries, including thirty banks in Japan, twenty-three banks in Russia, and thirty-one banks from countries in Africa. China’s apparent goal is to internationalize the use of the yuan through CIPS, and more countries are starting to join in, with Argentina deciding in April 2023 to switch to yuan instead of dollars when paying for Chinese imports. Brazil also agreed to settle all trade in their countries’ respective currencies instead of using dollars in March 2023.
These policy changes effectively decrease global dependency on the dollar while working towards China’s goal of economic internationalization of the renminbi. Despite this, CIPS still relies on SWIFT for translating messages between China and its business partners, with around 80 percent of CIPS payments estimated to use SWIFT messaging systems. CIPS is also not as popular as SWIFT, which is the go-to system for 11,000 financial institutions across 200 countries, including around 600 Chinese banks. CIPS is a formidable challenge to the US-led economic order, but it has a long way to go before it poses a serious financial threat.
The Russian Alternative
Russia decided in 2014 to create an alternative ruble-based payment system called the System for Transfer of Financial Messages (SPFS) in response to the United States and SWIFT threatening the Russian economy after the invasion of Crimea. When Russia began a military buildup on the Ukrainian border, the United States and the European Union responded to this aggression by threatening to remove Russia from SWIFT. This would have targeted Russia-owned banks, thereby removing their ability to purchase foreign armaments, sensitive technology, and essential equipment for Russia’s growing oil industry.
This alternative payment system has become very handy for Russia since Putin invaded Ukraine in 2022, and Russia is facing an onslaught of sanctions by SWIFT and the rest of the global financial system. However, the effectiveness of SPFS is limited to Russia’s domestic economy, with only an estimated 400 banks. The real threat SPFS poses is the conversation China and Russia have about connecting SPFS with CIPS to work around the SWIFT ban by trading exclusively in yuan to expand its capabilities.
A Potential Future Crisis
China will not become economically superior to the United States anytime soon, with the dollar being the dominant currency in 88 percent of the world’s trade. This does not mean China will never surpass the US economy. The United States needs to do everything possible to avoid this outcome. China is not a liberal democracy that respects the rule of law. The government poses the greatest threat to international peace in Asia. If this authoritarian regime successfully becomes the most economically influential nation in the world and can subvert America’s ability to impose sanctions, it is likely that actions such as the ethnic genocide in Xinjiang will remain uncontested by the United States and their allies.
Bloomberg Economics forecasts that due to China’s current economic slowdown, it will exceed America’s gross domestic product in seventeen years. However, if China and Russia could successfully combine their alternative payment systems and persuade their allies, such as India, Iran, and South Africa, to invest in this alternative system instead of SWIFT, the United States would face a formidable challenge. This would also pose significant national security challenges for the United States and the West if they are financially cut off from Africa, Asia, and the Middle East. The United States should economically incentivize its critical partners and China’s allies with programs that promote economic cooperation while emphasizing the dollar as the key currency used in financial transactions.
The views expressed in this article are those of the author alone and do not necessarily reflect the position of the Foreign Policy Research Institute, a non-partisan organization that seeks to publish well-argued, policy-oriented articles on American foreign policy and national security priorities.
- About the authors: Maximilian G. Mooradian is pursuing his B.A. in International Relations and a Minor in Chinese at American University’s School of International Service in the Class of 2025. He is interning with the FPRI Asia Program for the fall of 2023 and the spring of 2024.
- Source: This article was published by FPRI