File Photo: IC

The INSTEX mechanism set up by several European countries to skirt US sanctions on Iran can perhaps be used as a reference for China to hedge financial risks amid a trade war with the US.

At the beginning of the year, the UK, France and Germany set up a new transaction channel called Instrument In Support of Trade Exchanges (INSTEX) as an alternative to SWIFT, the backbone for international monetary transfers. 

SWIFT is a Belgium-based transaction service provider, but it is deeply influenced by Washington. US Treasury Secretary Steven Mnuchin said in a tweet in November that SWIFT would be "discontinuing service to the Central Bank of Iran", adding that "SWIFT is making the right decision." The moves by SWIFT have caused significant economic pain for Iran and indirectly supported US sanctions against the country.

Will the US use financial means to tackle its disputes with China, just as it did to Iran? It is still too early to draw any conclusion, but China should be prepared for the worst-case scenario.

Tensions between China and the US have intensified since US President Donald Trump imposed measures widely thought to target Chinese telecom company Huawei. If Washington uses financial means to continue its crackdown on the company, such as imposing financial sanctions on banks servicing Huawei or freezing the assets of the company in the US, such measures will deal a heavy blow to China's high-tech sector. 

Financial sanctions may have a more negative impact than restrictions on critical components imported by Huawei. Backup plans are needed to ensure not only continuity of supplies of critical components for Huawei's products, but also the strategic financial safety of Chinese companies.

China needs to follow the steps of European countries to map out a backup plan, in a bid to enable transactions in the absence of SWIFT. This is necessary to safeguard financial security amid the trade war.

The Cross-border Interbank Payment System (CIPS), launched in 2015 by China's central bank, will help China achieve the goal. The system, which mainly provides cross-border clearing and payment services for domestic and overseas financial institutions, has the potential to challenge SWIFT's dominant position in the global financial system.

The CIPS' business scope covers nearly 40 countries and regions along the routes of the Belt and Road Initiative. More banks are expected to be involved in the CIPS in the coming years, and we need to accelerate the process to safeguard China's financial security amid the trade war.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn