QPQ view on US sanctions

When it comes to helping their Russian allies, China will most likely try to get away with what they can, and any help they do offer you can expect them to drive a hard bargain, sensing Russian desperation and a chance to expand their own economic and geopolitical interests.

One such way they might go about offering support is through buying up cheap Russian commodities and deploying them alongside their own, creating an alternative global financial system built around a commodity-backed renminbi. However, it should be noted that Chinese banks are currently restricting financing for Russian commodities in an effort to avoid secondary sanctions. Moreover, in order to purchase those commodities, even at a war-induced knockdown price, China would require access to substantial amounts of capital. 

To secure the required funds, they would likely need to go down one of two routes. The first would be to sell Treasury holdings, but doing so would erode the value of China’s remaining US debt. The second would involve printing money, but that inevitably leads to inflation and economic instability, something China resolutely wishes to avoid at a time when Covid is still causing market turbulence and a degree of domestic unrest. 

It therefore seems unlikely President Xi Jinping would be willing to take such risks, incur potential secondary sanctions from the West and their international allies, or surrender the micromanagement of his economy by pegging the renminbi to commodities his regime cannot control.  

But what if there was a way for China to help Russia that was untraceable? That is where cryptocurrencies come in. This year’s Winter Olympics in Beijing featured the long-anticipated international trial of the digital yuan which was made available for athletes and spectators, both domestic and foreign. In total, it was used to make $315,761 worth of payments a day and was deemed a moderate success. 

China’s current crypto narrative is focused almost exclusively on the full implementation and expansion of their digital currency. Bitcoin transactions have almost disappeared off the map since the People’s Bank of China banned all cryptocurrency trading and mining within the country, ostensibly for legal and environmental reasons, but more likely in a bid to prevent further capital flight and to reassert total centralised control over all aspects of the economy.  

Russia’s sanctions, in particular their removal from the global financial messaging system SWIFT, offers an opportunity for China to promote international use of their e-yuan and enhance the development of their Cross-Border Interbank Payment System (CIPS), both of which have been tagged as matters of urgency in internal briefings. 

At present, CIPS has 1,200 member institutions across 100 countries, and its influence would increase dramatically if Russia were adopt it as their alternative to SWIFT, though it must be noted that it still sends its messages through the incumbent system, so cannot be considered a truly separate option.

While CIPS is positioned solidly for growth, the digital yuan is not yet ready for large-scale international use, and is in fact still struggling to find its place in the domestic payments market. From its first trial launch in April 2020 until the end of 2021, total e-yuan transactions in China totalled $13.5 billion, with 261 million individual users, but that is just a small fraction of the $7.6 trillion of online payments made in the country during the same period. This is mostly due to the continuing popularity of China’s two dominant apps for mobile pay – Alipay and WeChat Pay. 

It is not just because of its infancy that the e-yuan is currently incapable of making an international impact, it is also due to China’s tight capital controls which the state must maintain to ensure the stability of its heavily leveraged domestic financial system. Therefore, especially considering the scale of the sanctions, China is simply not yet in a position to use crypto to provide Russia with the hundreds of billions of dollars they require, and nor is the wider crypto market itself even developed enough to bridge that substantial gap. 

Even if they could fully, or even just to some small degree help Russia evade sanctions through their digital currency, the big question is – would doing so be in China’s best interests? As mentioned in a previous article, they have a long-term plan to create a de-dollarised world, but also currently rely heavily on trade with the West. The wider geopolitical implications of such a move must similarly be considered, which we will do in the last article in this series.