Wednesday 06 Oct 2021 | 09:34 | SYDNEY
Wednesday 06 Oct 2021 | 09:34 | SYDNEY

China dollars


Mark Thirlwell

22 May 2009 14:57

Keith Bradsher’s piece in yesterday’s New York Times, drawing on work by Brad Setser, looks at how China is changing its portfolio of foreign assets. In part, this involves Beijing switching the composition of its dollar holdings, moving out of the debt of government-sponsored enterprises like Fannie Mae and Freddie Mac and into US Treasuries, and more recently shifting from long-term Treasuries into short-term notes. 

China still remains a major holder of US dollar-denominated assets, however: Bradsher cites a Standard Chartered estimate that a hefty 82% of China’s mammoth US$2 trillion foreign exchange reserves is in US dollars. That leaves Beijing significantly exposed to swings in the greenback, and to shifts in US economic and financial policy: Premier Wen Jiabao expressed his concerns about the safety of China’s US assets back in March.

As Paul Krugman has pointed out, China has found itself caught in a dollar trap of its own making. There are also interesting historical parallels with  France’s sterling trap in the 1930s.  Olivier Accominotti explains how that episode ended badly, with a major sterling crisis, big financial losses for France, and an intensification of the Great Depression.

Fears about the consequences of the dollar trap are clearly one important explanation for China’s growing interest in the future of the international monetary system. In March, People’s Bank of China governor Zhou Xiaochuan attracted a lot of attention with a paper proposing a greater role for the SDR as a reserve currency.  Since then, there has been a growing discussion regarding the potential of the yuan itself to take over from the greenback as the world’s major reserve currency. 

It’s clear that for now the yuan is a long way off being able to fulfill this role. Still, there are interesting signs that China is increasingly keen on pursuing the internationalisation of the yuan, perhaps as a first step down this road.

Photo by Flickr user Magalie L'Abbe, used under a Creative Commons license.