If ever it were threatened with sanctions, China’s biggest source of leverage would be its own vast market
Save time by listening to our audio articles as you multitaskAmerica and its allies certainly have the means. “The locus of financial power still sits firmly in the West,” says Eswar Prasad of Cornell University. China probably keeps about two-thirds of its $3.2trn of foreign-exchange reserves in Western government bonds and the like. Because of the size of its holdings, it has few viable alternative stores of wealth.
China could find other ways to punch back, though. In particular, it could seize the sizeable assets that Westerners hold in China. At the end of last year, foreigners owned $3.6trn in direct investments, including immovable factories, and $2.2trn in shares, bonds and other “portfolio” investments, notes Gerard DiPippo of the Centre for Strategic and International Studies, a think-tank in Washington. The combined total is over six times the size of the equivalent foreign holdings in Russia.
Such measures would also wreak havoc with trade. Less than a fifth of China’s trade last year was settled in its own currency. Much of the rest was conducted in dollars. “If you can’t get insurance and trade credit, a lot of economic activity dries up,” says Martin Chorzempa of the Peterson Institute for International Economics, a research organisation. Since China is the leading trade partner of over 120 countries, the disruption might turn the rest of the world against America and its allies.
China’s biggest source of leverage is its own vast market. America might, for example, wish to deprive it of certain high-tech inputs, such as semiconductors. But a complete ban would cost American semiconductor firms 37% of their revenues, according to Boston Consulting Group, and jeopardise over 120,000 jobs.
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