Fearing the West’s cuts to Russia’s financial lifeline could happen to China, CCP seeks a way out
Since China opened its doors in the 1980s, the ruling Communist Party has been scrambling to grab resources worldwide and amass tremendous foreign exchange reserves by turning China into a global factory. However, the Western sanctions against Russia for its invasion of Ukraine put the Chinese Communist Party (CCP) on alert that its staggering wealth abroad could be frozen overnight.
China’s Ministry of Finance and the Central Bank Governors convened on April 22 for an urgent internal conference that included dozens of top executives of both domestic and international banks, to discuss how to protect the regime’s assets from U.S. sanctions similar to those imposed on Russia, reported the Financial Times on April 30.
At the meeting, some CCP officials raised the concern that Beijing could be subject to the same sanctions should it attack Taiwan, after roughly half of Russia’s foreign exchange reserves and the assets of multiple key financial institutions abroad were frozen by the United States, the UK, the European Union, and Japan.
Some bank executives suggested adopting measures like those recently used by Russia. They proposed that the Central Bank could command exporters to convert all foreign exchange earnings into Chinese yuan in a bid to increase China’s onshore U.S. dollar holdings. Others put forward cutting the annual amount of foreign currency that Chinese citizens are allowed to buy.
But no one came up with a sound solution, according to a source who was briefed on the meeting.
China’s foreign financial assets balance surpassed $9.3 trillion at the end of 2021, a 5 percent increase from the end of 2020, stated a financial report of China’s Foreign Exchange Administration.
Among external assets in 2021, the balance of international reserve assets accounted for nearly 67 percent or about $3.4 trillion, foreign exchange reserves reached $3.25 trillion, and currency gold went beyond $113.1 billion.
Regarding the currencies in foreign exchange reserves, the U.S. dollar made up an overwhelming proportion in long term despite the official data not mentioning it.
As reported by Jiemian, a Chinese financial media, on July 20, 2016, data from research of China International Capital Corp showed, as of the end of June 2016, the U.S. dollar comprised nearly 67 percent of China’s foreign exchange reserves, the euro nearly 20 percent, the British pound about 10 percent, and the Japanese yen about 3 percent.
The United States, Europe, and Japan are the main countries to hold down the Russian foreign exchange reserves and other financial assets in the Russia-Ukraine war.
In 2021, China has nearly $2.6 trillion in direct investment assets, sharing almost 30 percent of external financial assets, while $2.3 trillion, or 25 percent is in investments like deposits and loans, and approximately $1 trillion, or 11 percent, is in securities investment assets.
According to the 2021 direct investment data released by the United Nations Conference on Trade and Development, by the end of 2020, China’s foreign direct investment covered all sectors of the national economy, with more than 80 percent, or 189 countries or regions, receiving investments from China. Those investments incorporate six major sectors including leasing and business services (about 30 percent), wholesale and retail, software and information technology, manufacturing, finance, and mining.
Since the Russia-Ukraine war began, at least 41 countries around the world have imposed economic sanctions on Russia ranging from foreign investment withdrawal, and energy embargoes, to freezing of personal assets.
The Chinese Communist Party would face a tough challenge should similar sanctions be imposed on China.
Trillions in Foreign Investment in China
In this round of sanctions against Russia, a number of multinational energy giants pulled out their investments in Russia, inflicting a considerable blow to Russia’s energy industry.
In late February, BP, a British oil and gas firm, announced the sale of its nearly 20 percent stake in the Russian state-owned oil company. Another British energy conglomerate Shell also declared that it was dropping its joint venture with Gazprom, a Russian natural gas company. The U.S.-based Exxon Mobil said it would shut down a large oil and gas exploration project on the Sakhalin island in the far east of Russia.
Foreign companies have been investing in China for decades, with an accumulative stock of $7.3 trillion at the end of 2021, according to China’s “Balance of Payments” report.
If a large-scale capital exodus occurs, the CCP could not tolerate the impact.
By the end of 2021, foreign direct investment in China exceeded $3.6 trillion, which is equivalent to half of China’s foreign liabilities. Securities investment reached $2.15 trillion, the total market value of Chinese stocks and bonds held by foreign investors was close to $1.3 trillion, and the stock of other investments such as deposits and loans amounted to about $1.55 trillion, said the report.
Reliance on Imports and Exports
Global buyers shunned doing business with Russian companies after major Russian banks were excluded from the SWIFT international clearing system. Meanwhile, Russian energy and other commodities were embargoed, which drove Russia to trade oil at a record discount of $30 per barrel. Even then, it was difficult to find buyers as Russian vessels have been excluded from a number of key ports.
The EU has decided to significantly cut its dependence on Russian energy, planning to reduce Russian natural gas imports by two-thirds by the end of this year. Russia’s daily oil and gas exports to Europe amount to $750 million.
China’s trade interaction with the West is even greater than Russia’s, which means the Communist regime’s economy would find it difficult to withstand the same sanctions.
According to China’s General Administration of Customs, in 2021, China’s total imports and exports were at $6 trillion, with $828.1 billion (14 percent of the total) from the European Union, $755.6 billion (12.5 percent) from the United States, $371.4 billion (6.2 percent) from Japan, $362.3 billion (6 percent) from South Korea, $232 billion (3.8 percent) form Australia, $112.6 billion (1.8 percent) from the UK, and $81.8 billion (1.3 percent) from Canada; adding up to 46 percent of China’s total import and export market.
Unlike Russia’s export structure, which is dominated by energy, food, and other daily necessities, China mainly exports electrical and mechanical products such as automatic data processing equipment and parts, cell phones, home appliances, car chassis and parts, and other electrical and mechanical products, which amount to nearly $2 trillion, or nearly 60 percent of China’s total exports in 2021.
In addition, clothing and textile exports shared a higher proportion of approximately 10 percent.
China’s import dependence is relatively high on agricultural products, iron ore, and crude oil, and very high on semiconductor products.
China spent $432.5 billion last year on imported integrated circuits due to the accelerated development of emerging industries such as 5G, smart cars, and the Internet of Things.
In recent years, the United States and its allies are working to reshuffle a supply chain to exclude China and reduce dependence on Chinese products. If unforeseen circumstances speed up this process, China’s manufacturing exports and imports of key technology products could be in jeopardy.
Sanctioned Personal Assets
The sanctions imposed by the West on Russia include freezing the personal assets of high-ranking officials and wealthy individuals such as Russian President Vladimir Putin.
The overseas assets of the Red family, controlled by top CCP officials, are astounding. The 2018 billionaire report co-published by UBS and PwC revealed that 373 Chinese billionaires own $1.12 trillion in assets.
Swiss banks have been a haven for depositing money for the CCP’s corrupt officials because of its banking confidentiality.
According to WikiLeaks, the CCP officials have about 5,000 personal accounts in Swiss banks, “two-thirds of whom are central-level officials from the level of vice premier, bank governors and ministers to central committee members,” as reported by Indian-based Business World on July 28, 2020.
However, among sanctions on Russia, Switzerland froze the assets of Promsvyazbank, one of the largest private banks in Russia, as well as VEB.RF, the largest Russian investment company, reported the Tony Blair Institute for Global Change on March 24.
Therefore, from the standpoint of the CCP, Switzerland would not be a reliable place to hide money, rather, it will pose a great threat to the Party cadres’ overseas assets when it joins the West in possible sanctions.