If the US suddenly freezes China's foreign assets what would happen?

Replied thru Quora Digest by  Eddie Kwong

Neurogeneticist 

That would force countries who are dependent on China’s supply chains (i.e. emerging economies) to switch to alternative payment systems. Such countries would need to hold less dollars and more of whatever currency China will accept. They may push to broaden the use of their own cross-border interbank payment system (CIPS) which is a competitor the US controlled SWIFT.

The US dollar is already weakened from high demand around the world for covering repayment of US denominated debt. When the dollar is in high demand, it makes all other currencies weaker, essentially exporting inflation to those countries. Nobody likes inflation but everyone had to deal with it for decades because the US dollar was the most stable currency. That narrative has been hugely advantageous to the US. However, Covid-19 is now challenging that narrative, destroying US businesses by entire industries, putting indebted companies at tremendous risk of defaulting on bonds, putting millions out of work, exposing the incompetence of the US federal government, and forcing the Fed to print money forever (QE infinity) to buy all the crap debt and non-performing assets on banks and companies’ books. This is not a good time for the US take any punitive actions against China, much to the disappointment of all the hawks in the senate, white house, and the general population. Look at this GDP projection from the IMF for 2020 and note that only China and India (EDIT: also African, Central Asian, and Southeast Asian nations) are still going to be positive for growth this year. What’s the US going to do to China when they are expecting a -6% GDP growth this year, along with all of their traditional allies?

Also note that China hoards a lot more gold than they let on. They have 20,000 - 30,000 tons in country owned publicly by the government and privately by its citizens. The US reports 8,000 tons of but in reality they probably far less because a lot of it has been “loaned out” during the previous 2008 crash. So if the US were to do something stupid like “freeze China’s assets” China will announce to the world that they are willing to settle accounts in digital RMB and they will back said currency with their massive holdings of gold (and commodities) which would be instantly stabilizing to the RMB. They will push for support of a new global currency through organizations that they control like the Shanghai Cooperation Organisation and the Asian Infrastructure Investment Bank, and through economic pacts like the Regional Comprehensive Economic Partnership. They will reprice gold in RMB to be very very expensive which will encourage everyone holding USD to dump them and buy RMB. This would also force the US to revalue gold in dollar terms to prevent capital flight. This would severely devalue the USD and collapse the US-based financial world order. What are the US leadership going to do? Launch nuclear weapons at China and end the world? Or are they going to mobilize their carrier battle groups towards China only to have them wiped out by hypersonic anti-ship ballistic missiles? No our leaders are cowards and they aren’t willing to die for stupid causes.

Replied thru Quora Digest by Vince Dhimos

Master's in Russian from Kutztown State University

Eddie Kwong is absolutely right and I urge everyone to read his answer.

The fact is, there is already a very powerful movement to de-dollarize world trade settlements and it is well on its way.

Europe has devised a system called INSTEX, which can be used to by-pass SWIFT. The US has seized control of this Belgian organization and forces it to open its records to the US Treasury to see if any country is “violating” US sanctions. I put that word in quotes because the US is not in any way authorized by any international body to write international legislation so the idea of violating a US law when a transaction is made between two third-party countries is ridiculous to say the least.

The reason INSTEX was developed was to enable European countries to trade with Iran, and the first transaction has already been made. Using this system makes it impossible for the US busy-bodies to know how much was transferred to whom, and of course, to by-pass the US dollar using euros or local currencies. There is a similar system for transfers between Russia and China.

Slowly but surely, the dollar system is being replaced. The irony here is that the US is the mover behind these systems, with its oppressive sanctions. If the US had been wise, it would have used sanctions sparingly or not at all. But it was like the monkey who put its hand in the cookie jar. Greed made it clench its fist after it grabbed the cookies, and consequently, it could no longer withdraw its hand. It preferred to die of hunger rather than release its grip on the cookies.