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How Do Financial Risks Threaten China’s Economic Security?(2025/04/18)
How Do Financial Risks Threaten China’s Economic Security?
https://chinapower.csis.org/china-financial-security/
https://chinapower.csis.org/analysis/
resource: ChinaPower
Unpacking the complexity of China's rise
Chinese leader Xi Jinping has called for China to become a “financial superpower” (金融强国) rivaling established leaders like the United States, United Kingdom, and Japan. Yet, mounting geopolitical tensions and slowing economic growth at home have sparked concerns in Beijing about the country’s overall “financial security” (金融安全).
1 China has made notable strides in recent years to shore up financial risks, but numerous challenges persist. This ChinaPower feature explores four key vulnerabilities and three strengths in China’s financial security. Taken together, they paint a cloudy picture of Beijing’s long-term prospects of becoming a global financial leader.
Vulnerabilities in China’s Financial SecurityChina faces four important vulnerabilities to its financial security, each of which is outlined and analyzed below. These vulnerabilities are closely inter-related: strain in one area can exacerbate problems in another area. These are not the only vulnerabilities facing China’s financial system, but they encompass the most pressing risks in the eyes of regulators and investors.
Vulnerability 1: Exposure to Foreign Sanctions
Beijing’s threat perceptions with respect to financial security have shifted as China’s domestic and international conditions have changed. One of the clearest indications of this is the political messaging coming from Xi Jinping himself. Analysis of an official database cataloging Xi’s “important speeches” offers revealing insights:
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Xi has consistently stressed the issue of financial security during his tenure. Between 2013 and 2024, the phrase financial security
appeared in at least 44 state media reports of his speeches, meetings, and other activities.
In addressing China’s financial security, he has frequently stressed mitigating financial risks that could jeopardize China’s economic development.
But the types of risk facing China are evolving.
Historically, China’s attention has centered on building resilience to financial crises, like the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis. However, Xi’s mentions of financial crisis have declined markedly with time.
The threat of financial crises has not gone away, but Beijing now also perceives new, worrying threats from abroad.
In recent years, Xi has more frequently warned of the threat of weaponized foreign sanctions amid increasing economic and technological competition with the United States and its allies.
Xi’s mentions of sanctions surged in 2022 as the West imposed sweeping sanctions on Russia in response to its invasion of Ukraine.
Today, Beijing worries it could be targeted next, and it is buttressing its economy in preparation.
Beijing’s worries over sanctions initially spiked during the first Trump administration, when Washington imposed sanctions on Chinese companies, including technology giants Huawei and ZTE. The Biden administration escalated efforts to sanction Chinese companies and targeted China with a suite of export controls on advanced technologies, especially semiconductors.
Such targeted U.S. sanctions are a significant concern for China, but they do not pose a systemic risk to China’s economic and financial security. However, more sweeping financial sanctions—such as those imposed on Russia by the United States and its allies since 2022—could cause much greater pain for China’s economy.
In response to Russia’s invasion of Ukraine, Washington and its allies imposed sweeping sanctions targeting major Russian banks, state-owned firms, and key individuals, including President Putin and oligarchs. These measures included freezing hundreds of billions of dollars in Russian central bank foreign reserves, removing Russian banks from the Society for Worldwide Interbank Financial Telecommunications (SWIFT) international payment system, and restricting exports of critical technologies to weaken Russia’s military and economic capabilities.
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Imposing similar measures on China could inflict enormous pain on its economy. By cutting off access to dollars and dollar-based institutions, Chinese experts are worried that U.S.-led sanctions could jeopardize three major functions in China’s financial system: trade settlement, investment financing, and monetary policy operations.
U.S. sanctions could disrupt China’s trade flows by blocking cross-border payments. In 2024, China conducted $6 trillion of trade in goods with the rest of the world, roughly 71 percent of which was denominated in dollars and other foreign currencies.
3 These transactions are facilitated by a series of dollar-based international institutions, most notably SWIFT, the Clearing House Interbank Payments System (CHIPS), and various intermediary banks financing the trade process. Sanctions that bar access to these institutions would significantly curtail the ability of Chinese importers and exporters to settle payments for goods.
In this scenario, some of China’s trading partners would likely attempt to utilize alternative payment infrastructure. Yet many of China’s high-value imports are manufactured exclusively by companies in the United States or allied regions and thus would be particularly difficult for China to replace. Sanctions would likely also block China’s exporters from reaching key overseas markets, undercutting their bottom lines.
U.S.-led financial restrictions could also constrain China’s ability to raise capital and finance industry growth. China’s dollar-denominated debt owed to foreign lenders totaled just over $1 trillion as of June 2024, and it continues to raise funds through bond sales overseas. Chinese companies likewise raise money in foreign equity markets. Chinese firms listed on U.S. stock exchanges held a market capitalization of $1.1 trillion as of March 2025, and many more receive dollar-based venture capital funding and other forms of direct investment. U.S.-led sanctions could sever access to these avenues for raising capital.
Last, U.S.-led sanctions could destabilize Beijing’s monetary policy priorities. Massive reserves of U.S. dollars are essential to the ability of the People’s Bank of China (PBOC) to achieve its primary mandate to “maintain the stability of the value of the currency and thereby promote economic growth.” The exact value of dollar-based assets held by the PBOC is subject to debate, but a rough estimate suggests a ballpark figure of $1.6 trillion.
If Washington and its allies sought to exert pressure on Beijing, they could coordinate to freeze China’s dollar reserve assets held within their borders. This would quickly cause a shortage of dollars in China, leading to a drop in the value of the RMB, a shock in import prices, and challenges in meeting debt repayment obligations.
https://chinapower.csis.org/china-financial-security/
U.S.-led financial restrictions could also constrain China’s ability to raise capital and finance industry growth. China’s dollar-denominated debt owed to foreign lenders totaled just over $1 trillion as of June 2024, and it continues to raise funds through bond sales overseas. Chinese companies likewise raise money in foreign equity markets. Chinese firms listed on U.S. stock exchanges held a market capitalization of $1.1 trillion as of March 2025, and many more receive dollar-based venture capital funding and other forms of direct investment. U.S.-led sanctions could sever access to these avenues for raising capital.
Last, U.S.-led sanctions could destabilize Beijing’s monetary policy priorities. Massive reserves of U.S. dollars are essential to the ability of the People’s Bank of China (PBOC) to achieve its primary mandate to “maintain the stability of the value of the currency and thereby promote economic growth.” The exact value of dollar-based assets held by the PBOC is subject to debate, but a rough estimate suggests a ballpark figure of $1.6 trillion.
If Washington and its allies sought to exert pressure on Beijing, they could coordinate to freeze China’s dollar reserve assets held within their borders. This would quickly cause a shortage of dollars in China, leading to a drop in the value of the RMB, a shock in import prices, and challenges in meeting debt repayment obligations.
[size=1.125]“We should … oppose interference in internal affairs, oppose unilateral sanctions and “long-arm jurisdiction”, and jointly create a peaceful and stable development environment.”
Xi Jinping, 2020 BRICS Leaders’ Summit Concerns about these threats have galvanized Beijing to accelerate efforts toward sanctions resilience. China has sharply criticized U.S. sanctions against China and Russia, describing them as acts of U.S. “long-arm jurisdiction” (长臂管辖). Beijing responded to initial U.S. sanctions by passing an Anti-Foreign Sanctions Law in 2021, which set up a legal framework for China to retaliate against sanctions. This framework was expanded in March 2024 to include a broader array of retaliatory measures, an indicator that Beijing is bracing for deepening geopolitical conflict with its international rivals.
More broadly, Chinese leaders are striving to develop alternative financial infrastructure to reduce reliance on Western-dominated systems, and they view RMB internationalization as a cornerstone of strengthening China’s geopolitical position vis-à-vis the United States. However, despite notable progress, China’s financial system continues to rely heavily on U.S. dollars and thereby remains vulnerable to the threat of sanctions.
Learn more about Chinese policy measures in these areas:
(Click to expand)
Vulnerability 2: High Debt
Rising debt levels are another key threat to China’s financial security. China’s economy is permeated by highly indebted firms, which is a drag on overall economic performance and jeopardizes Beijing’s “bottom line of no systemic financial risks” (不发生系统性金融风险的底线). China’s high debt levels also weaken its international competitiveness by dissuading risk-averse investors from entering Chinese markets, thereby undermining Beijing’s stated goal of global financial integration.
China’s financial regulators often discuss these concerns in terms of improving China’s “macro leverage ratio” (i.e. its debt-to-GDP ratio), which the 14th Five-Year Plan highlighted as a key dimension of financial security. China’s non-financial debt reached 292 percent of GDP in 2024, which is considerably higher than most other major economies, including the United States.
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On paper, this debt is typically divided into central government debt, local government debt, household debt, and debt from private non-financial firms. In practice, however, these debt burdens are closely linked. Local governments that lent to questionable real estate and infrastructure projects are struggling to recoup their investments amid China’s ongoing real estate sector slowdown, and a growing number of local government-related investment products have defaulted or been flagged with warnings.
Share of China's Trade Denominated in RMB
Source: CSIS China Power Project; China State Administration of Foreign Exchange; People's Bank of China
https://chinapower.csis.org/china-financial-security/ |
凡事唯有投入，結果才能深入; 凡事唯有付出，結果才能傑出;
凡事唯有磨鍊，結果才能熟練; 凡事唯有不煩，結果才能不凡。
能與智者同行，你會不同凡響; 能與高人為伍，你能登上巔峰。
你雖不能改變環境,但卻可以轉換心境;你雖不能樣樣勝利,但卻可以事事盡力。
Dr. Chao Yuang Shiang, senior consultant & Assistant professor,Dep.of Finance,Nanhua University,Taiwan.
website:amazon.com/author/drchao |
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