Bank of China has finally succumbed to pressure and stopped its transaction operations with Russian banks, responding to the US secondary sanction imposed earlier this month.

In fact, three of China’s Big Four have already halted their transactions with Russian banks this year in response to the 12th EU sanction package against Russia.

Chinese banks have made huge asset growth in Russia over the past 2 years, thanks to the dramatic re-orientation of the Russian economy towards China:

Russia has been willing to allow itself to be “yuan-ized” to fight American imperialism through de-dollarization, and if China is not afraid of the secondary sanctions, they could use Russia as a front of their effort to internationalize the yuan in the upcoming currency war against the US.

Now, China is walking back. What are the major signs here?

First, it shows us that China is still not ready (or confident) to take on the US dollar yet, despite the fact that its economy is already larger than the US. This means that China will continue to rely on its export industries as the main thrust of its economic growth, and relying on the global trade network set up by the US, of which it is vulnerable to due to the ability of US to impose sanctions on Chinese goods (already happening to EV and solar panels).

Second, this will not hurt Russia’s economy in the long run, if anything it will only strengthen their import substitution efforts. However, it does compromise China’s ability to use Russia as a front to fight the currency war against the US, and this could be a huge loss of advantage for China.

Third, this also means that we are unlikely to see anything mind-blowing in terms of de-dollarization in the upcoming BRICS+ summit come October.

You see, de-dollarization (and defanging US imperialism) requires a concerted effort of mass debt cancellation across the Global South, and immediately followed up by the introduction of a new currency regime that is independent of the dollar.

Currently, we can go the short route: the RMB, or the long route: a new bancor-like BRICS currency (which is fundamentally different from a bloc currency like the euro).

Both require sacrifices from China. Since China is not willing to give up its export industries, the RMB will find difficulties in its internationalization effort and thus it cannot replace the US dollar for the Global South.

Similarly, the bancor system is designed to avoid the geopolitical economy we have today with countries running huge trade imbalances. It is specifically designed to punish the US (as the super importer running persistent trade deficit) and China (as the super exporter running huge trade surplus).

The whole point of bancor is to redistribute industrial capacities more evenly across the world so that every country can play a productive role in the global economy, and more importantly, allows them to build self-resiliency and self-sufficiency first instead of being subjected to IMF/World Bank style colonialism.

When the US de-industrialized itself and used its control of the global trade network to concentrate the industrial capacity in China decades back (at the expense of the rest of the Global South countries), it also tied China into this death pact.

For BRICS to administer a bancor-like system would mean that China is the country most punished (together with the US) by this new system. And we can see why China has been reluctant to cut off from this beneficial arrangement that it has enjoyed from the status quo over the decades.

The problem now for China is that the US is coming after them anyway. So, it’s a matter of choosing between enduring the short-term pain in getting out of the current system right now, or face the ultimate wrath of the US in which both go down in flames together.

Finally, I will re-iterate what I have been saying for a while:

China has two fundamental choices here. If China wants to get out of this mess, it has to make the first move, and the only way for it to go is to transition into a domestic-led consumption economy, which is now gaining popularity among the policymaking circle and known as the “Internal Circulation” (as opposed to an export-led economy, the “External Circulation”). This will allow China to raise the wages of its people and using the power of its currency to drive demand and re-distributing the industrial capacity across the Global South, thereby building a more equitable world that is independent of the US imperialist controlled trade bloc.

The second choice is to wait for the US to make the first move (already happening), in which the US uses huge outflows of its currency to regain dominance in a dollar-crunched Global South (thanks to the interest rate hikes) and tie them ever closer to the US-controlled network. In this case, the pressure from trade, tech and financial sanctions will cost China heavily due to the sheer dependence on an export-led economy.

And yes, there are only two players in this game, the US and China. Everyone else is just a sideshow. Sorry but that is the unfortunate reality of our global economy today.