As a continuation of Hideo Tamura’s essay, this article examines China’s dependence on foreign currency, capital flight, the Hong Kong route, the U.S.-China trade war, and the damage inflicted on the Xi Jinping administration by the Hong Kong Human Rights and Democracy Act. It also reveals how the Belt and Road Initiative is advanced through yuan financing, Chinese companies, and Chinese labor while trapping developing countries in dollar-denominated debt and enabling China to occupy infrastructure such as ports, airports, and railways as part of its expansion strategy.

April 7, 2020
The United States showed that it was prepared to ban exchanges between the Hong Kong dollar and the U.S. dollar.
This would become a matter of life and death for the Chinese economy, which depends on Hong Kong for 60 to 70 percent of its inflowing foreign currency.
Together with the U.S.-China trade war, this means that the Xi administration suffered a crushing defeat against the United States.
The following is the continuation of the previous article.
A method of winning orders that does not require foreign currency
Graph 3 shows the year-on-year changes in China’s foreign-currency reserves and external financial liabilities, as well as the trend in capital flight.
I stated earlier that the main source of foreign-currency inflow is China’s trade surplus with the United States.
Strictly speaking, however, China’s foreign-currency reserves are determined by the total of the current-account surplus, including the overall external trade balance, and liabilities from outside.
However, if capital flees abroad, foreign-currency reserves decrease by that amount.
Looking at the graph, capital flight has exceeded 200 billion dollars annually since 2015.
It shrank somewhat in 2018 due to tightening by the Xi administration, but since last year it has again turned upward.
Under such circumstances, in order to secure foreign currency, China has no choice but to increase its external liabilities.
It is thought that those who illegally take huge assets out of the country are party officials exercising vested rights, and the destination of their capital flight is Hong Kong.
It is common for China’s wealthy class and major corporations to establish bases in Hong Kong, and for those Hong Kong corporations to further establish paper companies in tax havens such as the Caribbean and transfer assets there.
Since the summer of 2018, the Xi administration has strengthened its crackdown on the Hong Kong route on the grounds of illicit accumulation of wealth, but this has ended unsuccessfully.
Furthermore, last year it pressured the Hong Kong government and forced revision of the extradition ordinance, including matters related to finance.
But it faced a fierce pro-democracy movement by young people in Hong Kong, who opposed the move as suppressing Hong Kong’s high degree of autonomy, and in the end was driven to withdraw the ordinance revision.
Moreover, the Trump administration signed the Hong Kong Human Rights and Democracy Act passed by the U.S. Congress, and showed that, if the Xi administration suppressed Hong Kong’s pro-democracy movement, it was prepared to ban exchanges between the Hong Kong dollar and the U.S. dollar.
If that happened, it would become a matter of life and death for the Chinese economy, which depends on Hong Kong for 60 to 70 percent of its inflowing foreign currency.
Together with the U.S.-China trade war, this means that the Xi administration suffered a crushing defeat against the United States.
Given such a state of affairs, one might think that the Belt and Road would no longer be possible, but the Xi administration’s offensive has not weakened at all.
Graph 4 shows the trends in Belt and Road projects on a contract basis and on an execution basis.
It is clear at a glance that, on a contract basis, the projects have been greatly expanded.
By contrast, the execution basis, which uses foreign currency, is at an extremely low level.
And yet, China has completed projects one after another in Asia, Africa, and the Middle East, including ports, airports, and railways.
The secret lies in a mechanism by which the Chinese side needs almost no foreign currency.
In other words, Chinese companies receive almost all of the orders for local projects, and they bring along large numbers of Chinese workers as well.
For this reason, the funds necessary to carry out the projects are lent in yuan by Chinese state-owned banks to state-owned enterprises, and most labor costs can also be paid in yuan.
In the project contracts exchanged with the governments of the partner countries, the debt borne by the local government is denominated in dollars.
If poor developing countries become unable to repay this dollar-denominated debt, China exercises the right to occupy the ports and other facilities it has built for nearly one hundred years.
For China, the Belt and Road is at once a means of acquiring foreign currency through the export of goods and people, and an expansion strategy that converts the occupied infrastructure to military use and expands its sphere of influence.
This article continues.