Liu Xiaochun, deputy dean of the Shanghai New Finance Research Institute, told the South China Morning Post recently that Beijing should consider developing a digital alternative to SWIFT in order to protect itself from US sanctions.
Liu told attendees at the China Finance 40 Forum, a think tank made up of senior Chinese financial experts and officials, that while creating alternatives to the US-dominated world financial system is tough, the recent signing of the Regional Comprehensive Economic Partnership (RCEP), the world’s largest free trade pact and a deal the US isn’t party to, presents new opportunities.
“Under RCEP, currency choices for regional settlement in trade, investment and financing will increase significantly for the yuan, yen, Singapore dollar and Hong Kong dollar,” Liu said. “Chinese financial institutions must unite with other countries and regions to position themselves beforehand to adapt to the needs.”
Building on Domestic CIPS Program
According to SCMP, Liu’s outline for such a project would be spearheaded by five Chinese banks with overseas branches, which could establish their own network for exchanging financial information. Then, major Chinese banks could start their own technology platform company that would allow other banks to participate and would be linked to the Cross-border Interbank Payment System (CIPS) China started up in 2015. Eventually, this could be extended into a regional and then global system for clearing bank payments.
China and Russia have previously looked at developing their own SWIFT alternative that would be based on CIPS and Russia’s internal wiring service, the System for Transfer of Financial Messages (SPFS).
After the Bank of China began urging Chinese banks to adopt CIPS in July 2020, the hawkish Washington, DC-based Atlantic Council think tank dismissed Beijing’s fears, saying the suggestion the US would cut an economy as large as China’s out of SWIFT is a “red herring.”
“US or EU sanctions would need to impair Chinese banks’ ability to process domestic transactions for economically- or politically-sensitive Chinese parties for movement away from SWIFT to become possible,” the think tank wrote, “an unlikely scenario absent major escalation.”
However, SCMP noted that the US could still pressure SWIFT with more targeted sanctions, for example, at specific companies or banks under US sanctions, as it has repeatedly threatened to do.
Fears Have Precedent in Iran Sanctions
In the months after the US unilaterally withdrew from the Joint Comprehensive Plan of Action (JCPOA) in May 2018, the US successfully pressured SWIFT into complying with US sanctions against Iran, even though the US was the only country to withdraw from the deal and its other signatories did not agree that Iran had violated the deal’s terms. Other partners, including France and the UK, had indicated their willingness to continue trading with Iran, but SWIFT’s compliance with US sanctions helped to block those plans.
In response, they formed the Instrument in Support of Trade Exchanges (Instex) to circumvent US control over SWIFT, with eight European nations joining the mechanism by 2020.
However, despite Instex, Iran’s foreign trade has declined precipitously since US sanctions began being re-implemented in August 2018.