China meets with banks to discuss asset protection from US sanctions

Chinese regulators have held an emergency meeting with domestic and foreign banks to discuss how to protect the country’s overseas assets from US-led sanctions, similar to those imposed on Russia for its invasion of Ukraine, according to people known. with the discussion.

Officials are concerned that the same measures could be taken against Beijing in the event of a regional military conflict or other crisis. President Xi Jinping’s government has been unwavering in support of Vladimir Putin during the crisis, but Chinese banks and companies remain wary of dealings with Russian entities that could lead to US sanctions.

The internal conference, held on April 22, included officials from China’s central bank and finance ministry, as well as executives from dozens of local and international lenders such as HSBC, the people said. The Ministry of Finance said at the meeting that all major foreign and domestic banks operating in China were represented.

They added that the meeting began with remarks from a senior Treasury Department official, who said Xi’s government had been put on alert by the ability of the US and its allies to withdraw the Russian central bank’s dollar holdings. to freeze.

The officials and attendees did not mention specific scenarios, but a possible trigger for such sanctions would be a Chinese invasion of Taiwan, which China claims as its territory and has threatened to invade it if Taipei refuses to submit to its control indefinitely.

“If China attacks Taiwan, the decoupling of the Chinese and Western economies will be much more serious than… [decoupling with] Russia because China’s economic footprint is affecting every part of the world,” said one of those briefed at the meeting.

Andrew Collier, general manager of Orient Capital Research in Hong Kong, said the Chinese government was rightly concerned “because it has very few alternatives and the consequences [of US financial sanctions] are disastrous”.

Senior regulators, including Yi Huiman, chairman of the China Securities Regulatory Commission, and Xiao Gang, who headed the CSRC from 2013 to 2016, asked bankers in attendance what could be done to protect the country’s foreign assets. , especially the $3.2 trillion in foreign reserves.

China’s huge dollar-denominated holdings range from more than $1 trillion US Treasuries to New York office buildings. For example, the state-owned Dajia Insurance Group owns the Waldorf Astoria New York.

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“Nobody on the ground could come up with a good solution to the problem,” another person said at the meeting, “the Chinese banking system is not prepared for a freeze on its dollar assets or exclusion from the Swift messaging system, as the US has done. to Russia.”

HSBC did not respond to a request for comment.

Some bankers suggested the central bank could require exporters to exchange all of their foreign exchange earnings for renminbi in order to increase its onshore dollar positions. Exporters are currently allowed to keep a portion of their foreign exchange earnings for future use.

Others suggested a “significant” cut in the $50,000 quota that Chinese nationals are allowed to purchase each year for overseas travel, education and other offshore purchases.

When an official asked Chinese bankers if they could diversify into more yen or euro-backed assets, they replied that the idea wasn’t practical.

However, some bankers in attendance doubted Washington could ever afford to cut economic ties with China, given its status as the world’s second largest economy, its vast holdings of dollar assets and its close trading relationship with the US.

“It is difficult for the US to impose massive sanctions on China,” Collier said. “It’s like mutually assured destruction in a nuclear war.”

Additional reporting by Tabby Kinder in Hong Kong

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