Could China Use Ukraine War to Challenge US Dollar Hegemony?

Could China Use Ukraine War to Challenge US Dollar Hegemony?
A clerk counts stacks of Chinese yuan and U.S. dollars at a bank in Shanghai on July 22, 2005. (China Photos/Getty Images)
Fan Yu

Russia’s war in Ukraine, as well as the West’s response so far, has been a gift to China.

The West’s strict sanctions on Russia have isolated the country from much of the world. It needs a financial lifeline.

The war in Ukraine, and the West’s sanctions against Russia, is providing a unique opportunity for China to establish its currency in global trade and in turn destabilize the west. In other words, Beijing could now accomplish what it had wanted but was unable to achieve for years.

Sanctioning Russia isn’t as simple as sanctioning Iran or North Korea. Russia is a major producer and exporter of commodities such as crude oil, gas, wheat, diamonds, and other minerals. Once upon a time, the value of paper money was derived from the commodities backing it.

With the sanctions in place, the global commodities market is now fragmented. For example, we have non-Russian produced oil whose price is skyrocketing while Russian oil has fewer takeout channels and can be bought at a significant discount.

Much of the ongoing discourse has been focused on the question of how much China can and is willing to help Russia. But I believe the question should really be: how far will China go to flout Western sanctions in order to help itself and weaken the United States?

Natural resources is a national security issue, a fact U.S. lawmakers spent years trying to dismiss but with the war in Ukraine, were only recently forced to recognize.

Beijing sees this clearly. China has been trying to secure energy supply for decades. Earlier this year China signed a 30-year gas supply deal with Russia’s Gazprom. In February it reached a deal to increase wheat imports from Russia. Russia’s status as an outcast gives China an opportunity to secure valuable commodities, while making Russia more reliant on China, its currency, and its financial network.

Let’s get the obvious points out of the way. Beijing is under scrutiny, especially around whether its companies would violate “secondary” sanctions imposed by the United States, such as providing materials to sanctioned Russian firms. It’s a legally gray area.

But China has extensive infrastructure in place to circumvent sanctions. Beijing has done it in the past with Iran. Its major international banks and corporations doing business in dollars and euros will not participate, or at least not openly. But the Chinese Communist Party has enough non-dollar-facing financial infrastructure in place and experience in creating off-balance-sheet vehicles to procure Russian commodities.

The bigger picture implications on future global trade are more worrisome.

Global sanctions have effectively frozen Russia’s foreign reserves. In other words, Moscow no longer has access to its foreign currency reserves. This raises a key question for China and other countries less tied to the U.S.-Europe hegemony—if or when they run afoul of the West, would their accounts also be confiscated?

And given this risk, should they diversify some reserves away from the dollar?

Enter China and its currency (gold and bitcoin are other options, but the scope of this column is on China’s currency).

China has been pushing the renminbi for international trade without much success, even after its Belt and Road program. China and Russia have been decrying the dollar as de facto global trade currency. Today, all commodities are priced in U.S. dollars, and for countries, there is no alternative (the TINA principle).
China could use this opportunity to finally create an alternative to the dollar hegemony and rewind the global economic backdrop to the Cold War era. To a third-party neutral country, the broken commodity market could induce the country to buy oil at a discount from China than paying a premium for non-Russian-sourced oil. That could be the beginning of a new global order and everything China had wished for when it created its digital renminbi.
The financial magazine Barron’s recently pointed out that this war has been “one of the few times that investors fleeing riskier assets have turned to the renminbi.” According to Jefferies global strategist Sean Darby, Russia seems to have already “quasi” pegged the ruble currency to the renminbi since last year in the “first real evidence of de-dollarization.”
And it’s not just Russia. Saudi Arabia—whose relationship with the United States has cooled in recent years—is reportedly considering accepting the renminbi instead of dollars for oil purchases from China.

Respected Credit Suisse rates strategist Zoltan Pozsar took this a few steps further. In a March note to clients aptly titled “Bretton Woods III,” Pozsar stated this is the start of a new global monetary order powered by Asian currencies backed by a basket of commodities.

The war and the West’s sanctions on Russia will cause China to buy up and store commodities, in turn strengthening the renminbi (increasingly backed by real assets) and destabilizing the dollar (backed by only credit) while worsening the inflation crisis in the West.

In essence, it would severely hurt U.S. and European economies.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Fan Yu is an expert in finance and economics and has contributed analyses on China's economy since 2015.