China Exploring Other Payment Networks to Evade Western Sanctions, Researchers Say

Beijing is looking to grow Renminbi-based financial networks to create an alternative to the dollar-dominated global financial system, which could help the country shield itself from some Western sanctions if it invades Taiwan, researchers and policy experts said this week. Although China isn’t yet ready to rely on those networks, that could change within several years, experts said.

A new report from the Atlantic Council and the research firm Rhodium Group analyzes how China may respond if it’s faced with broad financial and trade sanctions after invading Taiwan. The report details how Beijing may look to evade those sanctions, saying the country is searching for “alternative mechanisms for maintaining access to financing and trade transactions” if its banks were to be blocked from using the dollar.

The researchers warned that a “rapidly growing number of domestic and crossborder payment projects are being designed with the possibility of Western sanctions in mind,” which may present challenges to government agencies tasked with implementing sanctions, including the Office of Foreign Assets Control.

China is specifically working to develop networks that can handle cross-border banking transactions that “don't touch the dollar and settle near instantly,” Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center, said during an April 2 event hosted by the think tank. He stressed that those networks are “not ready for primetime,” but they are “scaling up,” and government authorities should factor them into their sanctions planning.

“If you think of it from an OFAC perspective, from a Treasury perspective, from a correspondent banking relationship perspective, suddenly I may lose purview on the way I enforce sanctions going forward,” Lipsky said. “And that is really where we think about the possibility of digital currency or traditional payment systems bypassing the dollar.”

Peter Harrell, a former National Security Council official with the Biden administration, said Beijing wouldn’t need to necessarily build a new financial system to replace the dollar -- it would only need to build “something they could rely on in a crisis.” He said that’s “really important for policymakers to think about.”

He also said there are a “bunch of lessons” the U.S. can take from its sanctions against Russia, including Moscow’s ability to avoid some of the broad western restrictions since its February 2022 invasion of Ukraine.

“I think that if you had asked me in January of 2022 that if we were to put all of the big Russian banks on the U.S. [Specially Designated Nationals] list, is Russia still going to be able to carry on trade with countries all over the world,” Harrell said, “I would have said that's going to be very hard for them to do.” But even though “there were disruptions,” Harrell said, Russia was “able to move pretty quickly to find alternative payment mechanisms.

“And we see China gearing up today to do that.”

Experts during the event also discussed whether U.S. allies, including the EU, are also likely to impose sweeping sanctions against China if it invades Taiwan. Abigaël Vasselier, who leads the foreign relations program at the Mercator Institute for China Studies, said that remains unclear. “We should have no illusion on the fact that on the Taiwan question, Europe is divided,” she said.

But she also said she recently asked a “high-level official” in the EU whether he believes his country would join the other member states in imposing broad sanctions against China, which could invite retaliation from Beijing. “His answer was, very frankly, we are going to play the European card,” Vasselier said, meaning his country would go along with the rest of the bloc. “There is no other way but to have European unity when it comes to sanctions and when it comes to building up a case on Taiwan.”

Logan Wright, a partner with the Rhodium Group, said that as governments are planning a possible sanctions response to a Taiwan invasion, markets are closely monitoring for the event that could set off those measures. He said the “immediate response” to an invasion “is likely going to be some sort of significant tightening of U.S. dollar liquidity and reduced access to dollar funding for Chinese banks.”

Wright said companies believe the “Russia playbook will basically be followed.”