Hong Kong dollars are pegged to the US dollar, providing monetary stability to the financial hub. Image: iStock

The Hong Kong Monetary Authority (HKMA) has prepared emergency plans in case Hong Kong or mainland China is eventually sanctioned by the United States for supporting Russia in its war with Ukraine.  

HKMA chief executive Eddie Yue said the de facto central bank in Hong Kong maintained close communication with the People’s Bank of China (PBoC) on topics of financial security. He said the HKMA had plans to minimize risks in some extreme situations, such as the financial hub being removed from the SWIFT system.

Yue’s comments echoed a recent report published by the Financial Times, which said Chinese financial regulators and major banks held a meeting on April 22 to discuss the US sanctions China could possibly face.

Since Russian troops launched a full-scale attack on Ukraine on February 24, the US and European Union have imposed several rounds of sanctions on Russian officials, banks and oligarchs. They have also urged China to refrain from helping Russia to elude the sanctions. 

On March 12, SWIFT disconnected seven Russian banks and their designated Russia-based subsidiaries from its financial transfer network. The sanctioned banks include Russia’s second-largest VTB, Bank Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank and VEB.

On Wednesday, European Commission President Ursula von der Leyen announced that the European Union would stop purchasing Russian oil by the end of this year to punish Russia’s invasion of Ukraine. She also said the EU would boot Russia’s biggest bank out of the SWIFT global payments system.

As the West tightens the screws on Russia, Chinese financial regulators held a closed-door meeting with domestic and foreign banks on April 22 to discuss how they could protect China’s overseas assets from US sanctions similar to those imposed on Russia, the Financial Times reported on May 1. 

A 100 yuan bill and Russian 10 ruble coins. Photo: AFP / Demyanchuk / Sputnik

PBoC and Finance Ministry officials said Beijing was put on alert due to the willingness of the US and its allies to freeze dollar assets held off-shore by the Central Bank of Russia. They said decoupling of China’s and Western economies would be far more severe than that between Russia and the West.

The report pointed out that China’s potential invasion of Taiwan could trigger US sanctions against China.

The PBoC, China Banking and Insurance Regulatory Commission, State Administration of Foreign Exchange and China Securities Regulatory Commission held separate forums on April 22 to discuss how China could stabilize local markets and boost the economy by improving its financial system and safeguarding the country’s financial security.

The meetings came after the renminbi depreciated by 2% within the three days from April 19.

One idea is to fast track implementation of official digital currencies. On April 27, the HKMA issued a discussion paper about the feasibility of launching a central bank digital currency (CBDC), namely the e-HKD.

Yue said the HKMA had been actively studying central bank digital currencies, or CBDCs, in the past year covering the development potential and feasibility of an e-HKD from both the technical and policy perspectives. 

“In mainland China, CBDC aims to improve the efficiency of central bank payment systems and to provide a backup to retail payment systems operated by big technology companies,” Yue said. “The HKMA is exploring e-HKD mainly as a potential means to fuel innovation in a digital economy, and help position Hong Kong for possible challenges from new forms of money.”

On Tuesday, Yue said in a Legislative Council meeting that the HKMA and the banking sector had already prepared emergency plans for different case scenarios if Hong Kong was affected by the Russia-Ukrainia conflicts. He said the HKMA would be able to manage risks in some extreme situations, for example, if Hong Kong’s overseas assets were frozen or Hong Kong was disconnected from SWIFT.

In April 2020, the PBoC began the trial of its digital currency electronic payment (DCEP) system, also known as the digital yuan or e-CNY, in major cities including Shanghai, Chengdu and Beijing. The central bank said it was aiming to completely replace physical cash with e-CNY in the future. As of the end of last year, 261 million e-wallets that can store digital yuan have been set up.

Gong Liutang, a professor of applied economics at the Guanghua School of Management, Peking University, wrote in an article on April 14 that the launch of e-CNY could help lower transaction costs and boost China’s domestic consumption, as well as safeguard the country’s financial security.

China is leading the world with its launch of a central bank-backed digital currency. Image: iStock

“The current cross-border payment system is a global network established with SWIFT and China’s CHIPS as the core, which has the problems of low efficiency, high cost and poor security,” Gong said.

“The US can use SWIFT as a tool for financial sanctions, restricting companies in sanctioned countries from conducting cross-border businesses and threatening other nations’ financial sovereignty,” he said.

Liu said the digital renminbi would also help promote cross-border use of the renminbi and accelerate the currency’s internationalization.

Still, many market analysts have said Hong Kong’s removal from SWIFT would destroy the city’s financial system and economy.

They said if Hong Kong or mainland China was barred from using US dollars, the e-HKD or e-CNY would not help much to stabilize external trade and foreign investment for the two places. Yue also said in an article that the practical application of e-HKD had yet to be examined in Hong Kong and could face a lot of challenges and technical issues. 

Read: PBOC seeks to calm markets with reserve ratio cut

Follow Jeff Pao on Twitter at @jeffpao3