In the wonky world of finance, the People’s Republic of China (PRC) is trying to improve its ability to pay for more and more lethal People’s Liberation Army capabilities.

LCH, a London-based clearing house, operates as a central counterparty for entering complex financial contracts often referred to as derivative trades.  LCH plans to begin accepting China government bonds (CGBs) as collateral to backstop highly sophisticated financial transactions whose values depend, derivatively, on other securities.  Purchasers and sellers use derivatives to augment returns, guard against adverse market turns, and other personal or positional reasons.

Accepting CGBs as collateral to ensure creditworthiness of counterparties (1) bolsters liquidity for the PRC and (2) pushes risk onto others for trades that CGBs assure.  Accepting CGBs as collateral is an especially bad idea because the PRC retains the right to control all capital flows regardless of prior commitments.  Said differently for clarity, the PRC can, at any time and for whatever reason, simply decline to deliver the capital that it has promised to provide.

Two sets of observations provide context for a recommendation:

Observation one.  The PRC is the China in China government bonds; the same China that the current and previous US administrations have reproached for genocide in the westernmost territory it governs and the same China that provides components for Russian weapon systems enabling atrocities in Ukraine.  This China’s list of abuses against people spans ethnicity, geography, ideology, religion, sexuality and more.

Observation two.  The United States relies too much on bans, sanctions and tariffs that it levies on others.  Politically difficult to pass; administratively difficult to enforce and easy to evade, prohibitions impose costs on US officers who meet a constantly mounting set of enforcement expectations.

Recommendation.  Take a page out of investors’ playbooks.  Impose costs on investors themselves for investing in regimes that use fear, injustice and oppression as tools of governance.

The US government may lack the political determination or the financial appreciation to block LCH’s proposed acceptance of CGBs as collateral.  If it does, the United States, perhaps through the SEC working with Treasury and Commerce, should charge fees to those that rely on CGBs to reduce counterparty risk.

Furthermore, LCH’s announcement should sound and alert and prompt the United States to address PRC access to US investment capital more broadly.  The United States should require financial holdbacks for any US investor using mechanisms that either facilitate PRC access to capital or reduce the PRC’s cost for securing and using investment capital.  Doing so should be politically palatable, would lessen the need for law enforcement to create and maintain sophisticated financial dragnets and, best of all, give US institutions the ability to raise and lower PRC access and cost of capital in response to PRC rising or declining belligerent behavior.