China is posing a significant threat to the US, as it aims to replace the US dollar as the world reserve currency. The Chinese yuan is the third-largest trade financing currency and fifth-largest payment currency, with foreign investors demanding an increase in renminbi internationalization.
Chinese President Xi Jinping proposed creating a new system that reduces the dollar’s global influence, shielding China from the dollar’s impact through sanctions and the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system. SWIFT, founded in 1973, connects around 11,000 banks and is used by over 200 nations.
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 US in their conquest to reshape geoeconomics and geopolitics.
The impact of Russia’s War in Ukraine on the Chinese Yuan was significant, as the US and NATO imposed sanctions that banned Russian banks from using the SWIFT international banking system. China offered to help Russia’s faltering economy and economic isolation by increasing the exchange of yuan-ruble trade, allowing China to increase its economic influence, keep the Russian economy afloat, and remove the dollar from involvement in the mutually beneficial economic partnership between the two countries.
In February 2022, the yuan-ruble trade volume between China and Russia reached 2.2 billion yuan, increasing to 201 billion yuan by the end of the year. By 2023, bilateral trade volume rose by 32%, reaching $155 billion. The two countries pledged to boost bilateral trade to $250 billion by 2024, focusing on a Russian trade surplus that exports oil, gas, coal, and minerals essential to manufacturing semiconductors in China.
China’s actions aim to boost global economic influence by prolonging the Ukraine conflict, potentially gaining leverage over Russia as its primary trading partner, and shifting power balance in China’s favor. China has been working for years to create an alternative method to SWIFT, with CIPS being the best attempt so far. The idea was proposed in 2009, initially focusing on increasing trade. As of January 2022, CIPS served around 1,280 financial institutions in 103 countries, including 30 banks in Japan, 23 banks in Russia, and 31 banks from Africa.
Policy changes aim to reduce global dependency on the dollar and promote China’s renminbi economic internationalization. However, CIPS still uses SWIFT for messaging, with 80% of payments using this system. Despite its challenges, CIPS remains a significant financial threat to the US-led economic order.
In 2014, Russia created the System for Transfer of Financial Messages (SPFS) as an alternative payment system to the US and SWIFT, which threatened the Russian economy after the invasion of Crimea. The US and EU threatened to remove Russia from SWIFT, targeting Russia-owned banks and limiting their ability to purchase foreign armaments, technology, and essential equipment for Russia’s oil industry. Since Putin invaded Ukraine in 2022, Russia has been using SPFS, but its effectiveness is limited to Russia’s domestic economy. The real threat to SPFS is the conversation between China and Russia about connecting SPFS with CIPS to work around the SWIFT ban by trading exclusively in yuan.
China’s economic slowdown poses a potential future crisis for the US, as it may become the most economically influential nation in the world and subvert America’s ability to impose sanctions. If China and Russia successfully combine their alternative payment systems and persuade their allies to invest in this system instead of SWIFT, the US would face a formidable challenge and significant national security challenges. The US 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.
