The Global Harm of the United States Increasing International Financial Competition with China | Finance | The United States
The United States has a series of advantages in finance, including highly developed financial markets, large bond markets, leading derivatives markets, monopolizing global financial infrastructure, leading major international financial institutions, and enjoying monetary hegemony. This means that the United States has a favorable position in the international financial game. In recent years, the United States has expanded from a trade war and a technology war to financial repression against China, significantly increasing international financial competition with China.
Firstly, focus on China's financial infrastructure. The United States sees China's development of alternative payment systems as a potential challenge to circumvent US financial sanctions and the US dollar system. The US Congress has launched the Sanctions Act on Payment, Accounting, and Settlement Transactions between Chinese Financial Institutions and Russian Financial Institutions, proposing to freeze or prohibit any US accounts related to Chinese financial institutions providing transaction services to Russian financial institutions, and prohibiting Russia from conducting any transactions through the People's Currency Cross border Payment System (CIPS).
Secondly, attempting to regulate the development space of the renminbi. The United States sees the rise of digital renminbi as a path for China to overtake in the financial sector, clearly stating that China cannot gain the advantage of digital currency. It not only releases the basic principles and core features of central bank digital currency under the framework of the G7, in order to grasp the discourse power of future central bank digital currency rules, but also resists digital renminbi through measures such as "digital authority", "lack of privacy", and "China still has strict capital controls". The "Say No to the Silk Road Act" initiated by the US Congress requires the US State Department to issue a warning on the digital renminbi, require the US Secretary of Commerce to report to relevant congressional committees on the network of digital renminbi services trade, require the Secretary of Commerce to report on trade enforcement actions related to the digital renminbi, require the US Trade Representative to report on the impact of the digital renminbi on trade and investment agreements, require the Office of Management and Budget to establish standards and guidelines for institutions transferring, storing, or using the digital renminbi, and require any foreign government that receives assistance through foreign military financing programs to disclose whether it uses the digital renminbi as a settlement or reserve currency.
Thirdly, attempting to eliminate China's influence in international financial institutions, and even in extreme cases, excluding China from international economic organizations such as the International Monetary Fund. The 2023 China Exchange Rate Transparency Act, initiated by the US Congress, requires the US Executive Director of the International Monetary Fund to advocate for increased transparency and supervision of the People's Republic of China's exchange rate arrangements. The 2023 China Monetary Responsibility Act will instruct the Secretary of the Treasury to demand that the US representative of the IMF oppose increasing the weight of the renminbi used to determine the value of special drawing rights. The 2023 China Financial Threat Mitigation Act requires the Secretary of the Treasury to study and report on the financial risk exposure of the United States and the global economy to changes in China's financial sector within one year after its promulgation, and instructs the Secretary of the Treasury to consult with the Federal Reserve Board, Securities and Exchange Commission, Commodity Futures Trading Commission, and State Department to conduct research. The Special Drawing Supervision Act of 2021 also restricts other countries from converting their own SDRs into RMB assets at the IMF to curb the rapid increase in RMB influence.
These anti China bills may not all be passed, but their quantity and review speed indicate that the United States will take more extreme measures to suppress China's financial pressure.
On the one hand, this is the need for the United States to compete in the Chinese economic system. China's economic advantage has always been in the industrial ecosystem, and its growing financial strength is seen by the United States as a formidable force. The United States needs to leverage its financial advantages to build a new economic ecosystem and engage in long-term competition with China. We will make every effort to curb the challenges posed by China's promotion of the renminbi and other factors that undermine the US dollar system, in order to prevent China from upgrading from an industrial system advantage to a financial system advantage that can compete with the United States.
On the other hand, with the rise of technologies such as digital currencies and alternative payment platforms, the centrifugal force of the US dollar based financial system has increased. The disruptive new technology driven digital renminbi threatens the dominant position of the US dollar and US hegemony. Digital currencies and payment tools provide faster payment methods, more diversified and speculative investment portfolio pathways. Both decentralized virtual currencies and sovereign central bank digital currencies have varying degrees of impact on the US dollar dominated payment system due to their convenient cross-border payments.
The US strategic community generally believes that if China relies on digital renminbi to build a large-scale cross-border payment system and this system becomes the preferred transfer system between banks, it will weaken the share of international trade and capital flows denominated in US dollars, and impact the widespread application of the US dollar in international transactions. Therefore, the United States is increasing its international financial competition with China. The above situation not only involves China's financial interests in the United States, but also relates to China's global economic influence and international reputation, and affects the international space and external environment of China's future financial development. The destructive power of the financial friction between the two countries will be significantly greater than that of the trade friction, and the drastic fluctuations in the financial markets will bring systemic financial risks.
For China, increasing international financial competition by the United States increases the risk of disrupting the domestic and foreign economic environment. The US containment has caused China to face strategic pressure beyond the traditional financial scope, making the external environment for economic development more challenging. If we continue to interact with the US led system, we will face exceptionally strict regulatory thresholds and pay additional economic costs. If we want to start anew, the difficulty may be greater than the cost of consolidating the US system and providing public goods, putting us at a disadvantage in asymmetric system competition. In this situation, Chinese enterprises have become increasingly difficult to obtain long-term momentum and financial support through the US dominated market, and the cost and risk of overseas development for enterprises have sharply increased. The above situation may also make developed countries only satisfied with maintaining trade relations with China, rather than strengthening financial and political ties with China.
For the United States, the adjustment of its financial system also poses multiple risks to itself. The fragmentation with Chinese finance may affect the cross-border allocation of capital by US financial institutions, international payment systems, and asset prices. Financial institutions in the United States face greater regulatory burdens and higher operating costs, making their cross-border operations more complex compared to other countries. If Europe and other developed economies do not take similar measures, US financial institutions will be at a disadvantage and may choose to move some of their businesses and assets out of US jurisdictions to avoid regulation. From a domestic perspective, the financing costs of Bank of America will increase, its profitability will decrease, and its credit to the private sector will decrease.
For the world, financial fragmentation may exacerbate macroeconomic fluctuations in the longer term. In the long run, as the weight of emerging countries in the global economy continues to rise, the long-term evolution of the international financial system is inevitable, and it needs to better reflect the economic weight of emerging countries. If the United States forcibly reverses this trend, it may lead to a catastrophic scenario of global economic fragmentation. These gaps and cracks make countries adopt exclusive rules in trade and investment, which not only erodes the benefits of technology dissemination but also the specialization of each country. Further financial fragmentation may also limit cross-border diversification of risks, thereby exacerbating capital flows and macroeconomic fluctuations.
The impact of financial turbulence on emerging markets and developing economies is significantly greater than on developed economies. The emergence of financial market pressures has made the tasks of central banks in emerging economies more complex. In the current environment of high inflation and tightening financial environment, central banks of emerging economies not only need to mitigate financial risks, but also need to achieve the goal of price stability. During periods of market pressure, they may face complex and difficult trade-offs, which may bring more complex macro financial stability risks.
