Confidence in the Global Monetary System is Dwindling – China and Russia’s Central Banks Seek Solution

In late February, Russian troops invaded Ukraine and launched what they called a “military operation.” The reaction of the U.S. and its allies, all of whom supported Ukraine, was not long in coming. Economic sanctions followed, as well as sanctions against Russian finance. Some of Russia’s most important banks were excluded from the global SWIFT system, and Russian foreign assets such as currency reserves were promptly frozen by the United States. While this move sent a signal that Russia was being punished, in the background, a problem has emerged that the U.S. and its allies would probably rather not have. Namely, confidence in the global monetary system and the foreign assets of sovereign nations.

China’s officials convened an emergency meeting in late April to discuss a plan to protect China’s foreign assets. Since the sanctions against Russia and the freezing of their assets, Chinese confidence in the global monetary system has dwindled. The meeting was attended by the Chinese central bank, the Chinese Ministry of Finance, and domestic and international banks.

The meeting could well be seen as a way out in the event of further global tensions that directly affect China, such as a possible invasion of Taiwan. Moreover, China has repeatedly supported Russia since the conflict with Ukraine but has not intervened in the conflict itself. Prior to the invasion of Ukraine by Russian troops, Russia and China stated after a meeting to discuss economic cooperation that the two countries’ cooperation has no limits.

China is thus concerned that U.S. sanctions may really hit the country at some point because according to banks represented at the meeting, the Chinese system is not prepared for such sanctions. China holds about $3.2 trillion in foreign reserves and $1 trillion in U.S. government bonds and real estate investments in the United States.

In addition to the emergency meeting, the Russian and Chinese central banks will hold a meeting to discuss the payment system between the two countries. With Mastercard and Visa blockading Russia, there aren’t many alternatives left. China’s Union Pay or the Mir system could be alternatives for the two countries.

Beijing’s ambassador to Moscow, Zhang Hanhui, said,

“Regarding the promotion and use of the Mir and China UnionPay national payment systems in both countries, this question will be decided by the two sides’ central banks at consultations.”

For both nations, a solution would be absolutely essential. By 2024, the volume of trade is expected to reach $200 billion.

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