The power of western sanctions, the new economic weapon is a double-edged sword
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(The Economist magazine, April 23, 2022)
“Can the United States really step into the freezing and confiscation of China’s reserve assets?”
Toshi Wang, a former board member of the Bank of China, asked in a sentence released last month. Well, it’s a good question that can’t be answered easily.
After Russia invaded Ukraine, the United States and its allies imposed heavy sanctions on Russia’s central bank, disabling about half of its foreign exchange reserves.
It also separated some of Russia’s major banks from the Western financial system and banned many high-tech products from being exported to Russia.
So, if China takes geopolitical and careless actions like the invasion of Taiwan, can the Western camp impose sanctions on China as it did on Russia?
Western financial hegemony is still alive
The United States and its allies definitely have the means. “The center of financial dominance is still firmly in the west,” said Eswer Prasad of Cornell University.
China probably holds about two-thirds of its $ 3.2 trillion foreign exchange reserves in Western government bonds and the like.
The amount is so large that in reality there are few alternative means of accumulating wealth.
Also, if Western countries instruct their financial institutions to refrain from doing business with Chinese banks, Chinese banks will not be able to raise US dollars, euros and pound sterling.
But is it really possible to go that far to the west?
China’s foreign exchange reserve “freeze” may not be a major source of instability. Even if China wants to sell the government bonds it holds to the West, if it is sanctioned, it cannot sell it.
China cannot buy such securities again. But the bond market wouldn’t care too much about China’s absence.
China is no longer a big buyer these days.