Putin's financial isolation by the world's powerful is a warning to China's President Xi Xi Jinping (Feng Li/Photographer: Feng Li/Getty Imag)Bloomberg — It's the dominant geopolitical narrative of our age: The world economy is splitting into two blocs as a rising China and a declining United States clash over trade, technology and the pandemic.In the aftermath of Vladimir Putin's invasion of Ukraine and the resulting sanctions by the United States and its allies, that divide seems sharper than ever, but the contest also looks more lopsided.The economic isolation imposed on Russia has been a stark reminder of the persistence of American power.China is catching up with the United States in terms of gross domestic product, and has already eclipsed it in trade and manufacturing.But when it comes to the money architecture that underpins the world economy, the United States and its dollar-based system remains the undisputed leader.China catches up in economic weight... Share of world GDP (in PPP) Blue: US+EU Red: China"Financial power remains firmly in the hands of the West," says Eswar Prasad, an economist at Cornell University who has studied China's challenge to the dollar for years.This has been made clear as the United States and its allies in Europe and Asia have rallied around a series of ever-tightening sanctions after Putin sent his troops into Ukraine.They have cut Russia off from the world economy so deeply that the effects can be felt for years.Extensive sanctions have pushed the Russian ruble to an all-time low.Photographer: Andrey Rudakov/Bloomberg (Andrey Rudakov/Bloomberg)The ruble crashed, the central bank lost access to much of its foreign-exchange savings, the government had to impose capital controls, and giant international companies from Apple Inc. (AAPL) to Royal Dutch Shell Plc (SHEL) They ran out of the country.For Chinese President Xi Jinping, who a few weeks ago declared unbounded friendship with Moscow, the speed with which Russia's tap has been cut off is a cautionary tale, and a reminder of why Chinese leaders are so desperate to develop an alternative to US dollar hegemony.This may motivate Beijing to speed up that project.... but far behind in financial weight The Chinese currency remains a minor player on the world stage Dollar +Euro: share of global payments Yuan: Share of global payments Dollar +Euro: share of world foreign exchange reserves Yuan: Share of world foreign exchange reservesIn Washington, meanwhile, US leaders have heralded a display of US money power.When the history of this age is written, Putin's war against Ukraine will have left Russia weaker and the rest of the world stronger,” President Joe Biden said in his State of the Union address this week.In what may have been a stab at China, he noted that "in the battle between democracy and autocracy, the democracies are winning out."It is still early for someone to declare victory.The shock waves from Russia's war in Ukraine have only just begun.Oil prices, above $110 a barrel, already threaten to push inflation higher, driven to multi-decade highs in the pandemic.That spells danger for Biden, whose popularity has already been eroded by rising gasoline costs, and for Europe's leaders, whose economies remain dependent on Russian energy.Joe Biden's approval rating has faltered as Russia's war in Ukraine and rising gas prices take a toll on the president's popularity.Photographer: Eric Lee/Bloomberg (Eric Lee/Bloomberg)Investors have been quick to price in a more divided world economy.In the US, defense values ​​have soared after European countries such as Germany, which have long resisted allocating more money to their military, suddenly pledged to increase spending.And in China, companies linked to the payment system that the country has been trying to build as an alternative to Western ones have seen their shares soar.Many economists agree that polarization is real.Adam Posen, president of the Peterson Institute for International Economics, calls it the "corrosion of globalization."He says it started with President Donald Trump's trade war with China, and continued through the pandemic as economies turned inward.Now it has sped up."Everyone has been talking for a long time about the blocks and the global economy being divided," says Posen.He was skeptical before.Now, he thinks, “the stopped clock has finally started ticking”, and the end result will be a less productive and less innovative world economy as it becomes combative, with consumers around the world paying the price.But, at least in the short term, there are reasons to think that China will be in no rush to side with Russia in an all-out economic confrontation with the United States.Although China has refused to impose economic sanctions on Russia and will probably help it weather the sanctions storm by buying oil, gas and wheat, it seems that the limits of the “limitless” friendship are already appearing.Political leaders have spoken of the need for a quick ceasefire and some big Chinese banks have restricted access to financing for Russian commodity purchases.This pattern has been evident in the past: China may disagree with the political goals of Western sanctions, but has tended to avoid confronting them.Even Chinese state-owned banks, for example, have complied with past US restrictions on Hong Kong.Carrie Lam, the executive director of the pro-Beijing territory, said in 2020 that she was collecting "lots of cash" at home because US measures prevented her from basic banking services."Chinese banks are actually quite wary of running afoul of the US Treasury," says David Dollar, a senior fellow at Brookings and a former Treasury representative in Beijing.“The big Chinese banks are among the biggest in the world, they are deeply integrated into the global system.So they're going to be careful."The rationale for this caution: Xi presides over an economy that is much more deeply intertwined with the world than Putin's;in fact, more than he has ever been, after largely shrinking from any effect of Trump's trade war.Chinese exports broke records during the pandemic.An analysis by HSBC economists (HSBC) found that in the past three years, when talk of decoupling and an economic Cold War was brewing, China's trade grew about five times faster than the world average, while China's foreign direct investment in that country rose even as it fell elsewhere.Giving up all that to join Russia in an economic fight with the West right now "would be bad news for China," says Hui Feng, a senior lecturer at Griffith University in Queensland, Australia, and co-author of The Rise of the People's Bank. of China (The rise of the People's Bank of China in Spanish).“It will stock up on cheap Russian oil and other energy products.But it will suffer a structural decoupling in technology and investment.”That doesn't mean China will back down from its long-term goal of challenging America's financial supremacy.The events of the past week may accelerate that campaign, Federal Reserve Chairman Jerome Powell said Thursday in a Senate committee.For years, a certain degree of financial decoupling has been taking place on some fronts.The United States has taken a dim view of Chinese acquisitions in key US industries.Under Trump, he cracked down on Chinese companies listed on US markets.Some companies that got it are rethinking it.Chinese trucking giant Didi Global Inc. (DIDI), which held a $4.4 billion initial public offering in New York last year (against Beijing's wishes), plans to move its listing to Hong Kong. .Insurer FWD Group Holdings Ltd. has filed for an IPO in the same city, after tensions between the United States and China thwarted its overseas debut plans.Meanwhile, Beijing is beefing up its economic defenses.Xi has ordered the drive toward self-sufficiency in key industrial components such as semiconductors to accelerate.For years, Chinese companies have bought deposits of strategic minerals like cobalt.In the financial realm, China has created a digital currency that could soon be ready for cross-border use, and a payments system known as CIPS that offers an alternative to the Swift mechanism that Russia has been partially left out of.This would help Chinese companies and others circumvent the dollar-based system in the event of a sanctions attack, which would be likely if Chinese forces attack Taiwan, for example.CIPS may be used sooner as transactions between China and Russia increase.But it is currently a limited vehicle for avoiding sanctions, with just 75 participants, all of them overseas Chinese bank branches, and without an equivalent of SWIFT's interbank messaging system, Rhodium Group analysts said in a report Tuesday. Thursday.The People's Bank of China has also sought to diversify its foreign exchange reserves and reduce the weight of US Treasuries, though it remains the world's second-biggest holder at $1.1 trillion.China has created a digital currency that the central bank insists is ready for cross-border use, and a payments system known as CIPS that offers an alternative to the SWIFT mechanism.Photographer: Andrea Verdelli/Bloomberg (Andrea Verdelli/Bloomberg)In all of this, however, the problem for China is that it starts from a very low base.Efforts to build a system to compete with the dollar and to encourage greater use of its currency have not been very successful.The renminbi accounts for just over 3% of global payments via SWIFT and just 2.7% of official foreign exchange reserves.Edwin Lai, professor of economics and director of the Center for Economic Development at the Hong Kong University of Science and Technology, says it is not clear what China can do to speed up the process."The international monetary system has a lot of inertia," said Lai, who wrote a book on the yuan called One Currency, Two Markets: China's Attempt to Internationalize the Renminbi.(One currency, two markets: China's attempt to internationalize the renminbi in Spanish).Politically, the United States and its European allies have garnered massive global support for their diplomatic and financial campaign against Russia.In this week's urgent debate at the United Nations, 141 countries voted to condemn Putin's invasion, while 35 abstained.Only Belarus, Syria, North Korea and Eritrea voted with Russia, while the rest abstained.Singapore's government said it would impose unilateral sanctions against Russia, the first time in decades that the city-state and financial center has censured a foreign nation without the backing of the UN Security Council.Switzerland, traditionally neutral, has also done so.But there are important dissidents.Major emerging market economies such as Mexico and Turkey have refused to sanction Russia.The oil-rich countries of the Persian Gulf, such as Saudi Arabia, want to remain neutral.The same goes for India, the world's fastest-growing economy, which has long depended on Russia as an arms supplier.During Putin's visit in December, India pledged to triple trade between the two countries, and Russian state oil giant Rosneft signed a major oil supply deal.Battle lines?Democracies represent a shrinking share of the world economy, and this trend is expected to continue.Blue: Free Red: Partially free Gray: Not freeThis neutral status could be a boon to financial centers that manage to stay out of a contest between the West and its main rivals, according to Branko Milanovic, an economics professor at the City University of New York and author of Capitalism, Alone: ​​The Future. of the System that Rules the World (Capitalismo, solo: The future of the system that governs the world in Spanish).He argues that the Ukraine conflict and the Western response point to a fragmentation of capital, a world in which money cannot move as freely as it has for the last half century.Corporations and the super-rich, along with central banks, will seek safe places to store assets, out of the reach of governments fighting a financed war.At the top of Milanovic's list is a place like Mumbai.“It is a great financial center.India is a democratic country.India has no history of seizing money, nor does it have any incentive to do so.They are not part of the West and, as we see in the Russia crisis, the United States cannot dictate India's policy."Another view is that it is precisely the deep economic ties between the United States and China that will prevent a broader financial or even military conflict between them.This is the argument of Angela Zhang, a law professor and expert on the Chinese legal system at the University of Hong Kong.China has already been forced to contend with the scope of US sanctions and has found ways to resist their impact, it says, citing the blacklisting of telecom equipment makers Huawei and ZTE (000063), which were faced Washington's sanctions against Iran and North Korea.China has its own economic ties with US allies.It is central to a major trade agreement, the Regional Comprehensive Economic Partnership, which includes Japan, Australia and New Zealand but excludes the United States.American companies like Apple and Tesla (TSLA) will continue to want to sell their products in China's fast-growing consumer markets.The intertwined supply chains, even after recent bottlenecks and the inflation they fueled, illustrate America's dependence on China.Mutual need means things shouldn't go too far."Sino-US economic interdependence will be the best safeguard for peace," says Zhang.American companies like Tesla and Apple will continue to want to sell their products in China's fast-growing consumer markets.Photographer: Qilai Shen/Bloomberg (Qilai Shen/Bloomberg)Some in Washington believe that China made a miscalculation by aligning itself with Russia, and has been surprised by the force of US-led countermeasures.China has clearly made a major geopolitical mistake by joining Moscow on the eve of this catastrophic invasion,” says Jude Blanchette, a China expert at the Center for Strategic and International Studies in Washington."Their clumsy response of the last week and a half indicates how lost they are."Others see risks in the US assertion of its monetary power.Although the United States and its allies have wielded "the heaviest financial hammer we can think of," it has not stopped Russia's military onslaught, says Josh Lipsky, director of the Atlantic Council's Center for Geoeconomics.The long-term risk, according to Lipsky, is that the war ends with Russia occupying all or part of Ukraine and installing a puppet government.That would raise questions about the effectiveness of this week's display of US financial might.There are historical reasons why the world fears economic division into rival camps: it is what happened in the 1930s, heralding the Second World War.With the fighting in Ukraine growing fiercer by the day and Russia threatening to mobilize its nuclear arsenal, discussions of future financial deals continue to be overshadowed by events around Kiev and the other besieged cities in Ukraine."Everyone is caught up in geopolitical tensions," says Andrew Sheng, chief adviser to the China Banking and Insurance Regulatory Commission.“We are all losers from the current trajectory.”With the assistance of Bjorn Van Roye.Sanctions against Russia put the focus on the Central Bank of ChinaChina holds talks with Ukraine and moves further away from RussiaChina distances itself from Russia and urges to protect civilians in UkraineThis article was translated by Andrea González© Copyright, Bloomberg Line |Falic Media© Copyright, Bloomberg Line |Falic Media