Foreign exchange reserves: why China fears the next US president

The outcome of the US presidential election could well seal the economic fate of China, whose dollar reserves are a matter of great concern. With an economy in need of a boost, the Middle Kingdom fears the sanctions a future POTUS could impose. Beijing knows that the measures, if adopted, risk being severe. To counter this potential tsunami, economists are calling on China to de-dollarize some of its foreign exchange reserves, fearing a devastating US economic response.

Immediate risks: why China should reduce its dollar reserves

China, which is witnessing an unprecedented economic crisis, is holding its own the largest foreign exchange reserve in the world with approximately 3.3 trillion dollarsfacing colossal challenges. Zhang Ming, deputy director of the Institute of Finance and Banking of the Chinese Academy of Social Sciences, is sounding the alarm. With US elections looming, Beijing is worried the next president of the United States is intransigent and imposes sanctions. In addition, it is one of the 3 obstacles that threaten the recovery of the Chinese economy.

Spectrum“imprisoned dollarization” states where dependence on the dollar would threaten China’s economy in case of unilateral repressive measures.

Zhang suggests several ways to reduce risks:

• Asset diversification: moving from centralized management to more diversified investments;
• Transfer to companies and individuals: decentralize control of assets;
• Creating a sovereign pension fund: invest reserves in a more stable framework and less exposed to fluctuations.

WITH 55% of these reserves are still denominated in dollars in 2019, China knows that any retaliation will violently affect the stability of its reserves. Precedents are full of meaning: in 2022 The United States and the European Union froze 300 billion Russian assets in response to the invasion of Ukraine.

For China, whose relationship with Russia – with India it has absorbed 78% of Russian oil – worries Washington, these examples remind us that a backlash is entirely possible and could undermine the strength of its dollar assets.

Economic sanctions: danger to Chinese stability

If the word “sanctions” makes Chinese economists cringe, it’s because recent history makes clear the potential damage. US Treasury Secretary Janet Yellen said this in April Washington would not hesitate to use its “sanctions tools” again if Beijing gets too aggressive with Taiwanpushing towards inevitable war.

And Beijing did not forgetisolation imposed on Russiawhich was excluded from SWIFT, the international payment system, and whose foreign reserves were frozen.

Russian precedents show that such sanctions are possible against China, especially if a more aggressive US president takes the reins. The emergence of the US policy of monetary isolation is troubling, but China is preparing to respond.

after all its economy, a global engine, he can’t afford to bet everything on the dollar.

For Beijing, it seems to be the solution increasingly urgent de-dollarizationas evidenced by the gradual sale of its US government bonds, which went from more than 1,300 billion dollars to less than 800 billion dollars in three years. As for Japan, an ally of the United States, it is today the first holder of these titles, a situation that exposes Beijing to American political whims.

The tone is being set in Europe: Brussels has already introduced a massive surcharge on Chinese electric cars. Faced with such a context, the Middle Kingdom has some work to do to revive its economy.

Micaiah A.

The blockchain and crypto revolution is in full swing! And on the day the effects are felt by the most vulnerable economy in this world, I will say against all hope that I had something to do with it

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The comments and opinions expressed in this article are solely those of the author and should not be considered investment advice. Before making any investment decision, do your own research.