Another Big Leap for China

Eurointelligence has a great article today on the US overusing sanctions as a financial threat.

The result took a while but it’s Another Big Leap for China

China’s Cross-Border Interbank Payment System is not nearly as mature as the global clearing and settlement systems used by the west. But it is growing fast, and it is maturing. This week we read that China Development Bank agreed a loan of $290m to South Africa channelled through CIPS, the first intra-Brics loan agreement, denominated in renminbi. There will be a lot of firsts going forward. The overall size of CIPS compared to western payment systems is small. But the infrastructure is now there, and it gives China and its trading partners a route to diversify away from dollar-dominated flows. Another layer of this system is Brics Pay, a blockchain-based technology that connects CIPS and other domestic payment systems of the Brics countries. CIPS also has its communication layer, which makes it independent of Swift, the inter-bank communication system dominated by the west.

The dollar is the single biggest global chokehold enjoyed by the US. The fact that all dollar transactions at one point go through the US gives the US government the ability to impose secondary sanctions on foreign companies and banks.

We are observing this in many areas: when countries apply their choke-holds, the rest of the world innovates around this, and diversifies away from it. Alternative payments systems exist only because the US has made excessive use of its financial powers. When the foreign policy community in the US discovered the potential of the dollar as a coercion tool, they did not factor in that the potential of the tool depletes the more frequently it is used. When the Biden administration used its choke-hold on high-performance semiconductors by banning their sale to China, they also misjudged China’s ability to develop their own.

We expect the same to happen also with China exercising its choke-hold over rare earths. While it will not be easy for the rest of the world to make itself independent on magnets that are essential for electric engines, it is not impossible to reduce one’s reliance on China, as Japan did in 2010 when China first applied its rare-earth choke-hold by banning their sale to Japan after an incident near the disputed Senkaku Islands in the East China Sea.

Note that the discussion is not about using BRICS as a currency. Rather it describes BRICS nations using non-SWIFT mechanisms to avoid dollars.

I have been discussing the ultimate demise of Swift for years.

What Does China Do With a Dollar That’s No Longer Risk Free?

In light of Fed actions against Russia, I pinged Michael Pettis at China Financial Markets some questions on China’s reserves on March 18, 2022.

Please consider my 2022 Pettis Q&A post What Does China Do With a Dollar That’s No Longer Risk Free? Buy Gold? 

Q&A With Michael Pettis

Mish: Will China now hold more commodities and fewer dollars despite the pro-cyclical nature of it? More Euros or Yen over dollars? More gold?

Michael Pettis (emphasis mine):

1: “Given that so much of China’s “reserves” are now indirect and held by state-owned banks (all the increase since 2017) it’s hard to say what the currency composition of China’s reserves are.

2: “Officially the US dollar is still by far the biggest component, but it is slowly declining.

3: “I expect that this will continue as far as the official reserves go but, as you know, the hard part of reducing the US dollar component of your reserves is figuring out what the alternative should be, and with such high and growing reserves (once you include the indirect reserves at the state-owned banks) that is a very difficult question to resolve.”

Not Now Does Not Mean Never 

The demise of the current US-dollar financial system with SWIFT at the heart of it is underway. I just cannot tell you when the system crumbles, nor can anyone else. 

Although the dollar avoidance the BRICs seek is much easier said than done, not now doesn’t mean never. The recognition phase has started. 

Most do not realize the EU is involved even though it wants no part of the BRIC structure. Importantly, the EU’s annoyance at SWIFT is far more significant than any yapping by Brazil.

So, don’t be surprised if something truly significant starts with the EU, not the BRICs. That’s an idea I have not seen anyone else suggest.

A true BRICS currency still seems unlikely to me for reasons discussed many times.

However, SWIFT-avoidance is well underway and that will soon enough be a major success.

Trump has threatened BRICS nations with 100 percent tariffs if they create a competing currency.

But SWIFT, not a trading currency was and still is the real risk to the US.

For discussion, please consider More Gold Backed BRIC Currency Silliness on Dethroning the Dollar

Flashback Hoot

On April 13, 2022 I commented Janet Yellen Warns China on Russia and Creating a Bipolar Global Financial System

In a question and answer session, Yellen said that the United States needed to work hard with China to avoid a bipolar global financial system that pits democracies against autocratic countries.

Is that a hoot or what?

Related Posts

September 19, 2023: Lesson of the Day: Sanctions Don’t Work Because They Create New Markets

A person who touted a buyer’s cartel sanction success, now complains the buyers cartel leaks like a sieve.

The Real Risk to the Dollar

On September 15, 2025 I noted Trump’s Big Miscalculation on Sanctions in a Dollar-Based Transaction World

Sanctions and tariffs have not only united China and Russia, but also the world against dollar dominance.

I have pooh-poohed a BRICS currency for decades. And I still do.

At the same time, however, I cautioned the key idea behind BRICS is not a trading currency, but a way to avoid sanctions.

That has come to fruition, not through BRICS, but rather through CIPS. It’s not yet complete because it still uses SWIFT for some functions.

Lessons of the Day

• The more you depend on sanctions, the less they work.
• That’s the real risk to the dollar.

Ironically, that is the risk to China right now on rare earth minerals.

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