In a war with the U.S. over Taiwan, China would need to create a global network of companies under U.S. sanctions, seize American assets within its borders, and issue gold-denominated bonds, according to Chinese government-affiliated researchers studying the Western response to Russia after its invasion of Ukraine.
The sanctions against Moscow have prompted hundreds of Chinese economists, financiers, and geopolitical analysts to examine how China should mitigate extreme scenarios, including loss of access to U.S. dollars, according to a Reuters review of more than 200 Chinese-language policy papers and academic articles published since February 2022.
"In the context of intensified Sino-U.S. strategic competition and the Taiwan Strait conflict, we should be wary of the U.S. replicating this financial sanction model against China," wrote Chen Hongxiang, a researcher at a branch of the People's Bank of China (PBOC) in eastern Jiangsu province.
China, he said, should "prepare for a rainy day" to ensure its financial and economic stability.
The specificity of the scenarios and potential countermeasures are being reported for the first time by Reuters.
In assessing Russia's experience, many of the researchers warn that China's much larger economy and dependence on advanced foreign technology and commodity imports mean a sanctions fight with the West could be far more destructive. Some doubled down on the view that increasing interdependence could be a better approach than pulling up the shutters.
Senior U.S. military officers have said that Chinese President Xi Jinping has ordered the People's Liberation Army to be prepared to invade Taiwan by 2027. Beijing has not ruled out using force to take the island, though it has never shared details about war preparations.
But discussions about U.S. sanctions, including from researchers within China's foreign and financial policy establishment, surged 50% in the 12 months following the start of the war in Ukraine compared with the corresponding period a year earlier, according to a review of China National Knowledge Infrastructure, the country's largest database of academic literature.
"Analysing various possible scenarios and coming up with China's prevention, response and countermeasures are undoubtedly a top priority for China's policymakers," Yu Yongding, an economist and former central bank adviser, wrote in a journal article in July 2022.
Reuters contacted all the researchers named in this story directly or through their institutions but most declined to comment or did not respond. Yu referred Reuters to an op-ed he wrote on decoupling.
The PBOC said in a statement that the research papers written by its employees represent their personal views. The central bank did not address questions about its sanctions planning.
China's State Council Information Office did not respond to queries about Beijing's contingency planning.
LOOKING TO MOSCOW
The freezing of more than $300 billion in Russian central bank foreign currency assets and the removal of Russian banks from the SWIFT interbank payments system last year have particularly worried Chinese experts, given China's more than $3 trillion in foreign exchange reserves and its export-dependent economy.
"The risk that China's overseas reserve assets may be frozen seems more imminent," wrote Wang Yongli, general manager of China International Futures, one of the country's largest commodities and financial futures brokerage businesses.
Wang and several PBOC researchers wrote in articles that if the U.S. implemented Russia-style sanctions on China, Beijing should freeze U.S. investment and pension funds and seize the assets of U.S. companies. The papers did not name individual companies as potential targets.
Researchers have also formulated unconventional solutions to China's dependence on the U.S. dollar, partly inspired by Moscow's policies.
The Beijing-based China Center for International Economic Exchanges (CCIEE), which counts former commerce ministers among its leaders, published several analyses on lessons China should learn from Russia.
Sun Xiaotao, a CCIEE researcher, published an article in February that argues China should push for more gold-denominated trade to prevent major fluctuations of the yuan - echoing the Russian central bank's decision to increase its gold reserves by one million ounces since the Ukraine war began.
Reuters could not determine the extent to which the think tanks influence China's decision-making, but they are known to brief and write reports for leading officials.
Some of China's policies align with the papers' recommendations. Central bank data earlier in October showed the PBOC increased its official gold reserves for the 11th consecutive month.
ENERGY AND ALLIANCES
Besides financial sanctions, Russia's response to Western pressure on its oil, gas, metals, and chips industry has given food for thought to Chinese researchers.
Mou Lingzhi, an academic at the Shanghai Academy of Social Sciences, wrote in January that Russia's demand that its natural gas be paid for in roubles should spur China to accelerate the promotion of yuan pricing of commodities such as lithium, which is crucial for electric vehicle batteries.
Central bank researchers have echoed the point, with one from a PBOC branch in the island province of Hainan, Xia Fan, writing last November that China should "accelerate the process of international energy settlement" in yuan to weaken the dollar's dominance in the oil market.
Researchers at China Minmetals Corporation, one of the country's top miners, wrote in June that emergency plans to guarantee supplies of iron, copper, nickel, and other strategic metals were needed, noting that Russian nickel products were suspended from the London Metals Exchange as a consequence of the war in Ukraine.
Other researchers called for a new economic grouping that could protect China in a sanctions tit-for-tat.
Ye Yan, an economist at China National Oil and Gas Exploration and Development Company, wrote in January that the cheaper Russian oil China has enjoyed as a result of Western sanctions had created a model for a future "anti-sanctions corporate network" that would allow member countries to trade discounted goods.
Chinese researchers also suggested Beijing exploit cracks within the European Union and between the U.S. and its allies. One foreign analyst said there could be a lack of unity in the West.
"Achieving broad international consensus for a sanctions coalition on China would be orders of magnitude harder than for Russia due to the much larger volume of investments there and reliance on its market," said Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics in Washington.
SEEKING SOLUTIONS
Some analysts have highlighted the limits of yuan internationalisation, arguing instead that China should blunt sanctions by increasing its economic links with the U.S. and its allies.
Yu, the former PBOC adviser, wrote in his 2022 paper that it was unlikely the U.S. would seize trillions of dollars or refuse to pay the principal and interest on Treasury bills China holds.
"Due to the close economic and financial ties between China and the United States, the United States will not do something like 'kill a thousand enemies and injure eight hundred of its own,'" Yu wrote.
Wang, the China International Futures official, made a similar argument last year, noting that gold was not a practical replacement of dollar reserves because of the costs and risks associated with the transport and storage of large quantities of the metal.
In light of these issues, many of the researchers suggest Beijing further open domestic financial markets to tie the interests of the U.S., its allies, as well as companies from these countries with China, increasing the costs of sanctions.
Partly in response to this, the EU and U.S. have sought to derisk and diversify supply chains and on-shore production of chips. But these policies would take time to bear fruit, Chorzempa said.
"China's much more pronounced role in global value chains would also give it more opportunities for circumvention (of sanctions), and its ability to substitute foreign technology for indigenous production is far stronger than Russia's", he said.
Chen, the PBOC researcher, considered the "nuclear" option of China's excision from SWIFT, and concluded that increasing cooperation with the U.S. was the best way to shield China.
"The mutual penetration of the Chinese and American economies will inevitably weaken the willingness to impose financial sanctions," he wrote.
