Thread by @RushDoshi

Today's trade deal won't alleviate PRC fears of US financial statecraft.

So I'm excited to share a new piece with @NBRnews on Beijing's 10-year struggle against US financial power and its spread into state-backed digital currencies.

A few thoughts:

nbr.org/publication/ch…

But first, the piece is adapted from a longer book chapter published by @NBRnews last year.

It also makes up one-half of a two-part series with Fed EVP Richard Dzina on financial statecraft and multipolarity.

@NBRnews 1. GRAND STRATEGY: Financial instruments have long had a role in the grand strategies of great powers, and Beijing is no exception to this rule.

Beijing understands that financial power is critical to hegemony, and it fears US financial power while hoping to build its own.

@NBRnews 2. FEARING US FINANCIAL POWER: Hu Jintao often attacked the dollar in Party meetings, and top PRC bankers said the US used it to "topple" Japan's economy.

These concerns aren't gone. @JulianGewirtz has written about PRC fears of a "financial war" following the "trade war."

@NBRnews @JulianGewirtz 3. WEAKENING US FINANCIAL POWER: To address these fears - and with limited success - China has supported monetary diversification, the creation of parallel interbank messaging systems, and bilateral swap agreements to gradually reduce its vulnerability to US financial power.

@NBRnews @JulianGewirtz 4. SWIFT ALTERNATIVE: SWIFT is key to US financial power. It's a messaging system that facilitates interbank payments.

Getting cut off, as Iran learned, is disastrous.

So China built its own (redundant) version, CIPS, which also does messaging as well as clearance/settlement.

@NBRnews @JulianGewirtz 5. SWIFT CIRCUMVENTED: This concerned SWIFT execs, who told China to focus on clearance and settling:

"When we talked to CIPS, we said: ‘Why build your highway [ie, messaging platform] if the highway exists already?”

The answer, evidently, is to undercut US financial power.

@NBRnews @JulianGewirtz 6. A GREAT CURRENCY: But China also wants its own financial power. That's natural. Great powers have great currencies.

Jonathan Kirshner has noted that France built a franc area to exclude Germany in the 19th century. Germany, Japan, & the US built regional currency areas too.

@NBRnews @JulianGewirtz 7. OBSTACLES: But China lacks US advantages - rule of law, strong institutions, & deep/liquid capital markets.

It keeps its capital account "closed" - more so after a 2015 stock market crash - preventing full convertibility.

All this has undermined its global reach.

@NBRnews @JulianGewirtz 8. SHORTCUTS: So China has tried shortcuts to *regional* financial power: swaps, BRI, central bank agreements, a Hong Kong currency hub. Sheer size helps too.

Now, the RMB is used in more than 1/3rd of regional trade involving China, up from 7%.

@NBRnews @JulianGewirtz 9. DIGITAL CURRENCY: The arrival of state-backed digital currency may shake things up.

Beijing sees risk and opportunity in adopting it.

- It fears that if the US goes first, it'll lock in the dollar.

- But if China goes first, it hopes for a shortcut to financial power.

@NBRnews @JulianGewirtz 10. "LIBRA MOMENT": Facebook's announcement of its digital currency Libra was a shock.

The PRC Central Bank's research head said:

"If the digital currency [Libra] is closely associated with the US dollar….there would be in essence one boss, that is the US dollar and the US."

@NBRnews @JulianGewirtz 11. DIGITAL RMB: So Libra accelerated China's launch of its own digital RMB.

No one knows how it'll work. It could be a disaster. Or it cold fundamentally (and at long last) disrupt US financial power.

All that's clear is the PRC is focused on this and the US is not.

@NBRnews @JulianGewirtz 12. HEGEMONY AND FINANCE: US financial power is a bedrock of hegemony.

China has targeted it for roughly ten years, with limited success.

Now, technological disruption may serve these geoeconomic aims.

As the trade war cools, more financial struggle isn't far away.

/End