China’s SWIFT joint venture a ‘defensive move’ in US financial war after Alaska talks underlined ongoing tensions

Karen Yeung
·5-min read

China’s latest joint venture with the Belgium-based SWIFT financial messaging service is a “defensive move” amid ongoing tensions with the United States, highlighted by last week’s fractious talks in Alaska.

China’s central bank on Tuesday announced that a newly established joint venture with SWIFT and four Chinese institutions will offer localised financial services to make cross-border transactions more stable and secure.

The decision to set up the joint venture with SWIFT comes amid souring of global relations with the United States, the European Union, Britain and Canada imposing sanctions on several Chinese officials for human rights abuses against the Muslim Uygur minority in China’s Xinjiang province, prompting retaliation from China.

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The US will not accept that the world is changing and will keep imposing sanctions and escalate the financial war

Oriol Caudevilla

“Many people had expected that now with [US President Joe] Biden, things would be different, but we saw last week in Alaska it is actually still the same. To the US, China is a threat and needs to be undermined in every possible way,” said Oriol Caudevilla, strategic adviser at Alpha Bright Asset Management and fellow at the Digital Euro Association.

“The US will not accept that the world is changing and will keep imposing sanctions and escalate the financial war. This may affect China and may be a concern for China, and the joint venture is a defensive move.”

As China’s financial industry continues to open up to the outside world, more domestic institutions use the global financial network and information services provided by SWIFT.

But some Chinese medium and small-sized banks have reported unstable connectivity to the SWIFT network, affecting their cross-border transactions, the People’s Bank of China (PBOC) said.

The cooperation between SWIFT and Chinese-funded institutions is mutually beneficial with win win results

People’s Bank of China

The new entity will operate financial messaging services through a local network and set up a localised data warehouse to monitor and analyse cross-border payment messaging, the PBOC added.

“The cooperation between SWIFT and Chinese-funded institutions is mutually beneficial with win win results,” the PBOC said. “In the next step, supervision and guidance will be strengthened to promote the standardised development in all aspects of the financial gateway business.”

Chinese researchers and former officials have long been urging Beijing to make preparations for the worst-case scenario if tensions spiral out of control and the US imposes economic and financial sanctions to isolate Chinese banks and companies from the US dollar-dominated international markets.

But it remains unclear at this stage whether by operating a local network and setting up a localised data warehouse, the new joint venture with SWIFT can help circumvent the US sanctions by enabling Chinese companies to realise netting settlement services for their cross-border payments.

China’s SWIFT joint venture shows Beijing eyeing global digital currency use, to internationalise yuan

The SWIFT system has in the past afforded Washington broad powers to prohibit foreign countries from using the US dollar payments and clearing systems or restrict the US banking industry’s business dealings with them, leaving them unable to receive payments for exports, pay for goods or own US dollar-denominated assets.

Earlier this year, SWIFT established a Chinese joint venture, Finance Gateway Information Service, with the China National Clearing Centre, a wholly-owned domestic settlement subsidiary of the PBOC.

The joint venture also involves China’s home-grown cross-border settlement system, Cross-border Interbank Payment and Clearing (CIPS), the Payment and Clearing Association of China, a self-regulatory association for the payments industry, and the PBOC’s Digital Currency Research Institute.

Zhang Xiaohui, the former director of the monetary policy department of China’s central bank, last year said that Chinese financial entities are worried by the threat of the US’ long-arm jurisdiction hindering their US dollar settlement and clearing channels.

Most Chinese banks currently adopt a practice of making full US dollar payments and settlements directly with SWIFT abroad which are ultimately cleared in the US by passing through the US Clearing House Interbank Payments System (Chips), intensifying their dependence on the US financial system, Zhang said.

But China should instead refine its management of US dollar transactions and apply a net settlement approach, Zhang said. In many other countries, domestic banks first complete individual settlements locally before making the net settlement abroad, she said.

Similarly, Guan Tao, chief economist with the investment banking arm of the Bank of China, said last year that China should boost the use of its home-grown cross-border payment network system for yuan-denominated payments in a bid to reduce reliance on the US dollar financial system.

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In 2008, Beijing launched the Domestic Foreign Currency Payment System, which allows Chinese banks to clear their US dollar transactions with the central bank. In 2009, the scheme was expanded to allow Chinese banks to connect to Hong Kong’s US dollar clearing system via the Bank of China and Bank of China (Hong Kong).

Both payment arrangements allow Chinese banks to settle their US dollar payments initially with domestic authorities, who then clear their payments in the US in one consolidated transaction.

The method could minimise the scrutiny from the US on each US dollar transaction made by Chinese banks, helping prevent it from using SWIFT to cut off the clearing business between Chinese financial institutions and foreign institutions, Guan said.

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