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To what extent does China need the SWIFT system?
Some commentators have said that the U.S. might be considering banning China from the SWIFT system were they to support Russia with military aid. My question is, is China independent enough to barely budge were they to be banned from the SWIFT like the Russian were, or this may completely cripple China?

As per a Business Insider report:

In the aftermath of Russia's unprovoked invasion of Ukraine, some Russian banks were banned from SWIFT, the Belgium-based messaging service that lets banks around the world communicate about cross-border transactions. The ban has hampered cross-border transactions for Russia's trade and financial systems, isolating the country economically.

Now, both Russia and China are looking to establish alternatives to the US dollar hegemony.

Russia is touting an alternative ruble-based payment system called the System for Transfer of Financial Messages (SPFS). The system was set up in 2014. In late April, the country's central bank said it would start keeping the names of participants secret.

China's Cross-Border Interbank Payment System (CIPS) — which processes payments in Chinese yuan — also has potential to replace SWIFT. The system has an expansive network of 1,280 financial institutions, said Peter Keenan, the cofounder and CEO of Apexx, a payments provider that used to work with Russia's domestic Mir payment card. That's compared to SPFS' much smaller network of 400 users.

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    @CGCampbell It is framed in the context of the effectiveness of a political and diplomatic tactic, so I think it is appropriate here. Economics and politics necessarily overlap somewhat.
    – ohwilleke
    Commented Feb 23, 2023 at 16:18
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    Note that Russia has not been banned from SWIFT. A ban has been imposed on many, but not all, banks. For example, it seems Gazprombank can currently still process SWIFT transactions. This is a potentially significant difference. Commented Feb 23, 2023 at 18:34
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    U.S. might be considering banning China from the SWIFT system were they to support Russia with military aid. Not that it impacts the Q all that much or modifies the answers significantly, but I wonder if that is easily feasible from the Western end of things. The West doesn't rely near as much on Russia as it does on China. The West could gradually, slowly, uncouple from China, but pulling the plug on Swift from one day to the next? Bit of a nuclear - if you don't mind the pun - option there. Commented Feb 23, 2023 at 21:50
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    @ItalianPhilosophers4Monica Hard to see it being used in the absence of a Taiwan invasion.
    – ohwilleke
    Commented Feb 23, 2023 at 23:15
  • @ohwilleke They'll do a lot more than a SWIFT ban if Taiwan was invaded.
    – Nelson
    Commented Feb 24, 2023 at 1:09

3 Answers 3

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China needs the SWIFT system quite a bit, because its economy is heavily driven by international trade, especially exporting manufactured goods, in a diversified market with large numbers of small to medium sized exporters (as well as large ones) who have large numbers of international customers and need commercial banking intermediaries to conduct those transactions. Exclusion from SWIFT would have a dramatically greater impact on China's economy than this sanction did on Russia's economy as a result of the Ukraine War.

International trade accounted for 37.47% of China's GDP in 2021, according to the World Bank.

If you are, say, Saudi Arabia, with an economy that relying heavily on exports of a single commodity from a single seller to a handful of large international wholesale distributors (like Exxon, Shell, BP, etc.), you can have lawyers negotiate workable alternatives to exchanging funds through commercial bank mediated SWIFT transactions in individualized contract terms and the additional hassle and transaction costs of, for example, setting up a parallel correspondent banking system at a Swiss bank, is manageable.

But if you are a SHEIN selling cut-price fast fashion over the Internet to the world in myriad $100-$300 transactions, or a medium sized Alibaba vendor selling one kind of $15-$1,000 industrial part at a time to factories all over the world in small lots, this doesn't work. International money transfers require a system that both buyer and sellers can easily access. The collective volume of money transfers, with Chinese parties to the transaction, that are handled via SWIFT is substantial to the point where these transactions drive a material share of China's entire GDP.

The trouble with competing systems like China's Cross-Border Interbank Payment System, or Russia's System for Transfer of Financial Messages, is that they don't have a rich network of participants on both sides of the countries that engage in international trade and finance with each other outside China or Russia respectively. An international money transfer system that is heavily lopsided in only a single country doesn't serve its purpose very well.

In China's home-grown system:

At last count, there were 76 direct participants, mainly overseas branches of Chinese banks, located on every major continent except Latin America.

The Western alternatives have vastly more non-Chinese participants. And, China's own system handles only about 2% of China's international money transfers, of which, about 80% of those transactions also have to use the SWIFT system in addition to China's own clearing system.

In the case of Russia, which was mostly cut off from the SWIFT system as an economic sanction in reaction to its invasion of Ukraine, that wasn't a horribly big deal (Russia was not entirely banned from SWIFT even though a ban was imposed on many, but not all, banks. For example, it seems Gazprombank can currently still process SWIFT transactions.) This is because in the world of international trade, Russia's international commercial activity looks a lot like Saudi Arabia's even though it has a much more diverse domestic economy than Saudi Arabia. Russia is a welterweight in the non-fossil fuel international trade department given its population, level of economic development, the size of its GDP, and the diversity of its domestic economy.

Russia's economy isn't terribly commercial and manufacturing export driven, and Russia is less reliant upon foreign investment than ever.

Prior to the Ukraine War, exports were 31% of Russia's GDP. But about half of all Russian exports were of fossil fuel products whose exports were highly concentrated in a handful of exporters to a small number of importers. A large share of the rest of its leading exports: wheat, fish, gold, iron, and nickel are raw or minimally processed raw materials that were likewise sold to a small number of high volume industrial concerns in China and Western Europe. Those importers process Russian raw materials and then sell the finished goods to local wholesalers, who in turn sell them to retailers, who in turn sell the processed goods to the general public. Russia has very few direct to consumer, or even direct to retailer, exports as a part of its mix of exports goods. As previously noted, however, SWIFT isn't too important in situations where you have a small number of exporters and importers with high economic value transactions in every contract.

But in the case of China, this isn't so. China's international commercial activity is not a Saudi Arabian style natural resource driven trade concentrated in a few key exporting companies to a modest number of importing companies abroad. It is massively decentralized and commercial, and it is selling its goods in immense volumes to countries outside its own sphere of influence and outside of Russia's sphere of influence to countries in the West. And, in the West and in other countries outside China and Russia's respective spheres of influence, SWIFT is baked into international commercial dominance for compatibility reasons similar to the reason that everybody in the U.S. uses Microsoft Word, and that the Internet runs on a common HTML language.

If China were kicked off the SWIFT system, workarounds could be devised. But it would be comparable in economic impact to flooding the Pacific and Indian Oceans with 100,000 pirate ships intent on raiding its container ships. It would dramatically interfere with China's export driven sector that is one of the main drivers of its domestic economy and unprecedented sustained economic growth.

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  • Would it be fair to say that non-Western counterparts to Chinese trade are themselves currently also relying on Swift, if one assumes, as you do, that the transactions are insufficiently large/recurring to enter into custom special arrangements? Commented Feb 23, 2023 at 20:33
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    @ItalianPhilosophers4Monica I loosely lumped the world into four buckets for the purposes of this post: (1) Chinese sphere of influence, (2) Russian sphere of influence, (3) Western sphere of influence, and (4) places without significant international banking (e.g. North Korea). By "Western" I'm really meaning everything not in categories (1), (2) and (4).
    – ohwilleke
    Commented Feb 23, 2023 at 21:22
  • So, South America and Africa would also, in many cases, also be reliant on Swift? The reason I am picking at this is to contrast with Fizz's answer which talks more about "the West". Basically, China would not just be sawing off its own branch with its Western customers currently, it would also encounter much the same problem with everyone not in 1,2,4. And, from your answer, I get the sense that even trading w 1 and 2 would see trade friction increase quite a bit for small-ish transactions. Makes sense. Does mean that China and fans will gun for a Swift alternative in the future. Commented Feb 23, 2023 at 21:45
  • @ItalianPhilosophers4Monica South America is served exclusively by SWIFT vis-a-vis China which has no participants on that continent. At least most of Africa definitely uses SWIFT too. West Africa and Central Africa's banking systems, for example, are largely derivative of the French banking system. China has at least a token presence in some African countries.
    – ohwilleke
    Commented Feb 23, 2023 at 21:56
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In a nutshell, to the extent that it wants to trade with the West, or at least to the extent that it likes to have a trade surplus with the latter. China is not yet in a position to impose its own banking system on the West. Certainly not as long as China takes dollars and euros as payment, and keeps vast savings/reserves of those too. (And on the private-level equivalent of that, as long Vancouver, London, or even New Zealand and Australia real estate is more attractive for Chinese rich people than China is for Western millionaires' retirement homes.)

And "the West" here also includes the oil suppliers (in the Gulf mainly) that are US allies. Russia insofar doesn't supply enough energy to China to completely substitute those.

Some data, albeit from March 2022:

A report by CoinDesk noted that China’s CIPS – Cross-Border Interbank Payment System – has just 75 members, compared with more than 10,000 in SWIFT. [...] SWIFT pushes through 50 million messages a day compared to 15,000 through CIPS. [...]

“In practice, because CIPS is limited to payments in yuan, it is only currently used for transactions with China,” said [ chief Asia economist at Capital Economics Mark] Williams. “Banks elsewhere are unlikely to turn to CIPS as a SWIFT workaround while Russia is an international pariah.”

Williams added: “While the CIPS payments system doesn’t touch the US banking system, payments through it that were deemed to be intended to circumvent US sanctions could trigger sanctions for those involved. That effectively limits the use of CIPS to bilateral transactions between Russia and China.”

Those numbers may a bit outdated. Another article from April 2022 gives "11,000+ participating institutions in 200 countries" for SWIFT and "1,280 participating institutions in 103 countries" for CIPS, but it lacks an update/figure on the number of transactions, which is probably more important than nominal participation. (N.B. the first article also says "As well as 75 direct participants, CIPS says it has 1,205 indirect participants. Of those 934 are in Asia [...]" So they don't actually disagree that much, except on the direct/indirect angle being glossed over in the latter.) But the latter article also says

CIPS is different from SWIFT, as it is an RMB clearing and settling institution that utilizes SWIFT messaging to facilitate RMB transactions with the rest of the world. China’s CIPS is more similar to the United States’ Clearing House Interbank Payments System (CHIPS), which clears and settles domestic and cross-border U.S. dollar transactions and is plugged into SWIFT for cross-border messaging. [...]

China’s stated reason for creating CIPS is to boost RMB internationalization [...] And looking at just trade finance for 2022, RMB’s share of global currency in letters of credit and collections is only 1.92 percent, a percentage not proportional to China’s share of the global economy (the U.S. dollar is the first with an 87.38 percent share, and the euro is in second place right before the RMB with a 5.76 percent share).

On slightly more technical note, since CIPS is in fact much more similar to CHIPS than to SWIFT [as far as organizational structure], most of those 11,000+ SWIFT participants are only indirect participants in CHIPS, which only has 43 direct participants. The indirect participants have accounts with the direct ones (in both CHIPS and CIPS). CHIPS moves the actual money/dollars, while SWIFT only processes the messages. And CHIPS moves orders of magnitude more money than CIPS:

In March 2022, daily volume on CIPS was 385 billion yuan ($45.6 billion), compared to $1.8 trillion on CHIPS.

A sudden impositions of yuan-only payments for China's exports would be pretty much the self-imposed version of Trump's trade war, only much more quick/severe, because where can the West get all those extra RMBs?! I.e. it would quickly lead to an elimination of China's trade surplus with the West (including the EU), for better or for worse. Recall how proud Russia was how much its currency had re-appreciated [relative to Western currencies] after it started to demand payments in rubles. But that came along with many Western [including many Eastern European] countries not buying much from Russia anymore. Russia managed to redirect many of its exports because how narrow they are in terms of products [energy mainly] as well its smaller share in global [not just energy] trade, but it's more questionable whether China can find substitute alternative markets with the same speed and to the same extent for its trade surplus with the West. I.e. the impact for such a readjustment would be substantially harder for China to mitigate, in the same time frame.

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    Related, but I don't want to get into the details here: China has some of strictest capital controls, with a dual currency (CNY/CNH) which makes it no so attractive as a reserve currency (except maybe for Russia given their current lack of alternatives). Apparently the 2015-2016 mini-crisis convinced the Chinese leadership to tack back to preferring tighter capital controls over internationalization. Commented Feb 23, 2023 at 14:52
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The international order is something of a misnomer. It is mostly a western order having been built mostly be westerners. Inherently there is nothing wrong with that. However, politically speaking this gives the western nations an undue advantage.

China does not need SWIFT. It would inconveniance it in the short term, but in the long term it would work to their advantage if they can create - and which they can - a workable alternative.

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  • Well, [almost] no big country needs any other big country/continent in any way, on that vague line of arguments. Does Europe needs fossil fuel imports? It's just "a short term inconvenience, but in the long term it would work to their advantage if they can create - and which they can - a workable alternative." Does America need Chinese/Asian workforce? Etc. Commented Feb 25, 2023 at 2:58
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    @Fizz: Green energy is not nuclear fusion which even after a hundred years is proving elusive. Europe could easily have converted to green energy regime long ago and this would have meant that we would have prevented the climate catastorophe we now see. However, that political vision just wasn't there. This is why Thatcher, was plainly the stupidest prime-minister Britain ever had. All she wanted was to force trade union democracy to be brought to heel. This she did. But this was at the cost of democracy which we are now seeing a revival of with a wave of strikes right across Britain and ... Commented Feb 25, 2023 at 4:04
  • @Fizz: ... and across all classes. Commented Feb 25, 2023 at 4:04
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    @Fizz: Had Europe also converted to green energy long ago we would not also have been subject to the vagaries of oil diplomacy. We've seen that effect now with the energy crisis in Europe where gas supplies have been disrupted by the war in Ukraine. Commented Feb 25, 2023 at 4:07

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