China announced that it has long abandoned US dollars

China's holdings of external debt and currencies

China's foreign exchange reserves 2000–

To China's foreign exchange reserves

are the state of the People's Republic of China's holdings of cash, bank deposits, bonds and other financial assets denominated in currencies other than China's national currency (renminbi). In July 2021, China's foreign exchange reserves stood at US$3.15 trillion, the highest foreign exchange reserves of any country. [1]

The management of foreign exchange reserves is regulated by the State Administration of Foreign Exchange (SAFE)[2] and the People's Bank of China. [3] The composition of China's foreign exchange reserves is a state secret. [4]

Composition [edit]

The exact composition of China's foreign exchange reserves is classified information. [4] [7] In July 2021, the State Administration of Foreign Exchange announced that US dollar assets accounted for 58% of China's total reserves at the end of 2014, up from 79% in 2005, adding that the share of US currency assets was lower. than the global average of 65% in 2014. [8] Analysts believe that the remaining foreign currency assets are held primarily in euros, Japanese yen and British pounds. [7]

Since 2008, when it overtook Japan in this regard, China has been the largest foreign owner of U.S. Treasury securities, [9] accounting for about 22 percent of all U.S. Treasuries held by non-Americans. [10]

China announced that it has long abandoned US dollars

Photo Pixabay.com

On the eve of a new round of trade negotiations with the Americans, Beijing revealed the secret of the changing structure of its foreign exchange reserves. It turns out that long before the Sino-American rivalry entered the open phase, Beijing began to reduce the dependence of its own reserves on the American dollar.

US-China trade negotiations are scheduled for July 30, according to the Ministry of Commerce of the People's Republic of China. Washington previously announced that the conversation could be about protecting intellectual property rights, about ways to reduce the US negative trade balance with China, about eliminating non-tariff trade barriers and about developing trade in services and agricultural products. At the same time, the White House doubts the success of the meeting, not excluding that Beijing will now wait until the 2021 presidential elections. However, it cannot be said that China is inactive. In recent years, China has significantly changed the structure of its foreign exchange reserves, reducing the share of the US dollar in them.

“As part of the implementation of important agreements reached by the leaders of our countries during the meeting in Osaka, negotiators of the PRC and the United States will hold the 12th round of high-level consultations on trade and economic issues on July 30–31 in Shanghai,” said Gao, spokesman for the Chinese Ministry of Commerce. Feng. White House press secretary Stephanie Grisham also previously confirmed that negotiations would take place on July 30. The American delegation will be led by US Trade Representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin, while the negotiations from the Chinese side will be led by Vice Premier of the State Council of the People's Republic of China Liu He.

What is noteworthy is that the White House does not have much faith in the success of this meeting. In particular, US President Donald Trump previously did not rule out that the Chinese authorities would want to wait until the end of the US presidential elections, which will be held in November next year, and only after that conclude a trade agreement. “I think China will probably say, 'Let's wait these 14 to 15 months until the election. Let’s see if one of these people (Democrats) who will betray the United States wins the election,” the American leader said.

Recall that China and the United States have been negotiating for several months to resolve trade disputes. The last, 11th round took place in the first half of May in the American capital, but after that the dialogue reached a dead end. On May 10, Washington introduced additional duties on Chinese products worth $200 billion, increasing the rate from 10 to 25%. In early June, the Chinese government retaliated against more than 5,000 US goods worth $60 billion. The decision to resume consultations was reached during a meeting between Trump and Chinese President Xi Jinping at the G20 summit in Osaka on June 28–29. The American leader promised not to introduce new tariffs on goods from China, and also to ease restrictions on the activities of Huawei. In response, Beijing expressed its readiness to increase purchases of agricultural products from the States.

Amid the uncertainty surrounding US-China trade relations, China for the first time released a report from the State Administration of Foreign Exchange Control of the People's Republic of China. The document, in particular, discloses data such as operational indicators of foreign exchange reserves and their structure, as well as presents the concept of investing foreign exchange reserves, risk management methods, and more, the Chinese Xinhua agency indicates.

The most sensational conclusion of the report is the decline in the share of the US dollar in the structure of the country's foreign exchange reserves. In particular, it decreased from 79% in 1995 to 58% in 2014, the Chinese report. In turn, the share of non-dollar currency reserves increased from 21 to 42% over the same period of time.

At the same time, in general, China's foreign exchange reserves continue to increase. According to the People's Bank of China (PBOC), in June they grew by $18.23 billion to $3.119 trillion. China's foreign exchange reserves account for about 30% of the global total, according to data from the International Monetary Fund.

The Chinese themselves explain this change in the structure of foreign exchange reserves by the desire to “diversify” their assets. “China’s more diversified foreign exchange reserves will help reduce foreign exchange risks and reflect changes in the development of China’s economy and trade, as well as external payments,” Reuters quoted Wang Chuning, a spokesman for the State Administration of Foreign Exchange Control of China, as saying.

Beijing is not only diversifying its currency, but also increasing its gold reserves. As follows from the same report, from 2005 to the end of 2021, the country's gold reserves increased from 600 to 1852 tons. Thus, China today ranks sixth in the world in terms of gold reserves and is the world's largest gold producer, as well as its main consumer. Commenting on the data on gold reserves, the State Administration explained: “China is making adjustments to its assets dynamically, based on long-term and strategic considerations.”

Thus, the organization continues, the currency structure of China's foreign exchange reserves is becoming increasingly diversified. “And it is more diversified than the world average,” Beijing emphasizes.

If the US dollar's share of foreign exchange reserves remains at 2014 levels—58%—then China will have about $1.8 trillion in assets at the end of June, based on $3.12 trillion in foreign currency reserves at the end of June, writes the South China Morning Post (SCMP). At the same time, according to the US Treasury, at the end of May China owned US government bonds worth $1.11 trillion and was the largest foreign creditor of the US, the publication continues. However, agrees Li Jie, a researcher on China's foreign exchange reserves at the Central University of Finance and Economics in Beijing, the dollar's share of China's reserves has indeed fallen significantly. “Perhaps this is the result of China’s currency swap transactions with other central banks,” Li does not rule out the possibility. In particular, he explains, the PBOC previously signed bilateral currency swap agreements with about 40 countries, promising a total swap quota of about $500 billion. At the same time, China is deliberately reducing the weight of US dollars and expanding reserves of the euro and the currencies of other trading partners, Lee points out.

Beijing, as a major holder of US dollar assets, has repeatedly been accused of being able to “dump” its holdings in order to undermine US financial markets, SCMP writes.

The decline in the share of the American currency in the structure of China's gold and foreign exchange reserves, which has been continuing for several years, looks quite natural, according to NG experts. The trade conflict between the United States and China began not because of the structure of China's gold and foreign exchange reserves, but because of the growing technological breakthrough of the Celestial Empire, says the head of the department of the Russian Economic University. Plekhanova Elena Ustyuzhanina. “Thus, having started from a subordinate position in the global division of labor as a supplier of cheap labor, China is now increasingly pushing Western countries in high-tech areas of production. This strategy also requires weakening China’s dependence on the American market and the dollar,” she admits.

It is absolutely logical for China to eventually increase the share of the euro in its reserves, says analyst Alexey Antonov.
“The euro is almost the same liquid alternative to the dollar, and its share can, if desired, be increased to a volume equal to the volume of dollar reserves; this will be a stable bi-currency basket, where the depreciation of one currency is compensated by the growth of another, and vice versa,” the economist argues. In addition, Antonov draws attention to the fact that the whole world is concerned about the huge size of the US national debt. “Everyone wants to be prepared if the situation in the American economy suddenly leads to a default. This is also why China began trading in oil futures denominated in yuan at the beginning of 2021 - this was a powerful blow to the dollar, which will only intensify,” he believes, emphasizing that the ruble has completely different drivers against the dollar. “Weak economic growth will have the greatest impact, so the ruble will systematically weaken against the dollar, to 70 this year and to 80-85 rubles next year,” the expert does not rule out. “The change in the structure of China’s gold and currency reserves, which began long before the trade conflict between Washington and Beijing, is explained by the country’s simple desire to diversify its reserves, which, in the context of periodic financial crises and the threat of all kinds of trade and financial restrictions from the United States in relation to a number of countries including China, has shown to be correct chosen strategy,” emphasizes analyst Sergei Drozdov. At the same time, he continues, reducing the share of dollar assets in China’s reserves can also be seen as an attempt to reduce dependence on the “American”. “However, at this stage, a complete abandonment of the dollar is not possible, if only because of the lack of a clear alternative,” the expert is sure. “The dynamics of the structure of China’s gold and foreign exchange reserves do not have any fundamental distinctive features compared to what is happening in the new millennium with the foreign exchange reserves of other countries of the world,” says Vadim Iosub, a senior analyst at the analytical agency. Thus, in the last millennium, the world dealt with the only truly liquid (in terms of the scale of central bank operations) currency - the US dollar, and the corresponding liquid market for dollar government bonds. “All other world currencies occupied a small share of central bank reserves. Everything changed with the advent of a large regional currency - the euro. And central banks began to slowly diversify the structure of their reserves, first of all, reducing the share of the dollar in favor of the European currency,” he reports.

Concerns about Chinese holdings of US debt[edit]

Many American and other economic analysts have expressed concern about the People's Republic of China's "extensive" holdings as part of its United States government debt reserves. [11] [12] [13]

The National Defense Authorization Act of fiscal year 2012 included a provision requiring the Secretary of Defense to conduct an "assessment of the national security risk of U.S. federal debt held by China." In July 2012, the Department of Defense released its report stating that "attempting to use U.S. Treasury securities as a coercive tool would have limited effect and would likely harm China more than the United States." Since the threat is not credible and the effect will be limited even if it is carried out, it does not offer China containment options, be it in the diplomatic, military or economic spheres, and this will remain true in both peacetime and crisis or crisis scenarios . war." [14]

The 112th US Congress introduced legislation whose purpose was to assess the impact of China's ownership of US debt. [14] A subsequent 2013 Congressional report argued that "[a] potentially serious short-term problem would arise if China suddenly

decides to significantly reduce its liquid U.S. financial assets" [emphasis in original text], noting also that Federal Reserve Chairman Ben Bernanke had in 2007 stated that "because foreign holdings of U.S. Treasuries represent only a small portion of the total of the volume of US credit market debt outstanding, US credit markets should be able to absorb without undue difficulty any shift in foreign allocations." [ 14]

A significant number of economists and analysts dismiss any concerns about foreign holdings of US dollar-denominated government debt, including Chinese holdings. [15] [16] [17] [18] Critics of the "excessive" amount of US debt held by China acknowledge that "the biggest effect of China's large-scale dumping of US Treasuries would be that China would actually export fewer goods to the US." [13]

Links[edit]

1. "Official Reserve Assets - July 2020". State management of foreign assets
   .
2. See State Administration of Foreign Exchange Website -> English -> ABOUT SECURITY -> Basic Functions
3. ^ a b
   About PBC, the website of the People's Bank of China
4. ^ a b
   "China's declining foreign exchange reserves cause concern", Gabriel Wildau,
   Financial Times
   , 18 October 2015
5. "Official Reserve Assets - July 2020". State management of foreign assets
   .
6. "Chinese Stocks Fall in July as PBOC Stabilizes Yuan Amid Capital Outflows" Fion Lee, Bloomberg
   , August 7, 2015
7. ^ a b
   "China's large foreign exchange reserves are both a blessing and a curse", Gabriel Wildau,
   Financial Times
   , September 30, 2014
8. Xin, Zhou (July 29, 2021). “How much of China's foreign exchange reserves are denominated in US dollars?” . South China Morning Post
   . Retrieved August 19, 2021.
9. "Major Foreign Holders of Treasury Securities," U.S. Department of the Treasury, February 18, 2014.
10. "Report on China's Foreign Exchange Reserves and US Securities Holdings" by Nargiza Salidzhanova, US-China Economic and Security Review Commission, March 21, 2014.
11. “Is China's Ownership of American Debt a National Security Threat?” Kenneth Rapoza, Forbes
    , January 23, 2013
12. “...Should Americans be concerned that China has begun dumping some of its Treasury reserves? Ultimately, this raises serious questions about whether China will continue to lend money to Washington to help finance federal budget deficits in the future.": From China. resets US debt" Matt Egan, CNN, September 11, 2015
13. ^ a b
    "Is there a risk to America that China holds more than $1 trillion in US debt?"
    ", China Power
    , February 2, 2021.
14. ^ a b c
    Report "Chinese US Securities Stockpiles: Implications for the US Economy" by Wayne M. Morrison and Mark Labonte, Congressional Research Service, August 19, 2013.
15. : “...What about debt to foreigners? … To purchase [U.S. government bonds], China must export goods to us rather than offset equivalent imports. This is the price for China. It's a price Beijing is willing to pay for its own reasons: export industries promote training, technology transfer and improved product quality, and provide jobs for rural migrants. But this is Chinese business. For China, the bonds themselves are a fruitless treasure. nothing Beijing can do with them... its stock of treasury bonds will continue to grow. And we will pay interest on them without making any real effort, but by entering numbers into computers. There is no burden associated with it; not now and not later." From "In Defense of Deficit" by James K. Galbraith, The Nation
    , March 4, 2010
16. “...The Chinese buy US Treasury securities by transferring US dollars (not RMB) from their checking account at the Federal Reserve Bank to a Chinese government securities account, also at the Federal Reserve Bank. When [ever] the Chinese buy back these T-securities, the money is transferred back to China's checking account at the Fed. Throughout the entire purchase and redemption process, dollars never leave the Fed.” : From “What Policies for Global Prosperity?” Posted by Warren Mosler, September 23, 2010
17. Mitchell, Bill, University of Newcastle (Australia). "The US Government's Nearly Limitless Capacity to Spend" (March 28, 2012); "The US government can buy as much of its own debt as it wants" (August 27, 2013)
18. “...The United States, as a sovereign currency issuer, does not face financial constraints. They cannot be forced into default. They control their political interest rate. The rest of the world is users of the dollar, not issuers. They will never be able to hold [the United States] hostage." : From the article “What if China dumps US Treasuries?” by L. Randall Rhea, University of Missouri-Kansas City, November 12, 2013

On April 7, the State Administration of Foreign Exchange released data showing that China's gold reserves stood at 60.62 million ounces (1,885.5 tons) at the end of March, up 360 thousand ounces (11.2 tons) year-on-year. the total cost is $75.525 billion.

The sequential increase lasted for four months, starting in December 2021.

“What can be considered the most disastrous decision? Undoubtedly, the restrictions and sanctions America imposes in the field of the financial market and trade.

From a global perspective, when faced with US sanctions, one can actually resort to a similar tactic: trying to find a way to reduce the importance of the US dollar in settlements. Therefore, since December last year, China began to increase its gold reserves, and, putting aside all fantasies, in the long term there will actually be an increase in hard currency, which will not be tied to the American dollar in any way.

On the other hand, you can pay attention to the fact that those four months during which China has been increasing its gold reserves are also the period during which the Chinese yuan has moved from consistent depreciation to a phase of continuous revaluation. Moreover, these four months are the period of the most dangerous negotiations between China and the United States in the field of trade. I don’t think this is a random series of coincidences,” says Jin Yanyuan.

Wang Chunying, a representative of the State Administration of Foreign Exchange Control and chief economist, answered a journalist's question about the change in foreign exchange reserves for March 2021.

Q: The latest foreign exchange reserve data released by the State Administration of Foreign Exchange shows that from the end of February to the end of March 2021, China's foreign exchange reserves increased by $8.6 billion. What caused these changes? What are the next trends?

Answer: As of the end of March 2021, China's foreign exchange reserves totaled $3.0988 trillion, an increase of $8.6 billion, or 0.3%, from the end of February.

Bloomberg 03/29/2019 Handelsblatt 02/04/2019 Handelsblatt 01/14/2019

In March, under the influence of many factors, such as trade and economic negotiations between China and the United States, the expected adjustment of the monetary policy of the European and American central banks, uncertainty regarding the Brexit issue, the US dollar index increased slightly, but at the same time the value of financial assets also increased. The combined influence of factors such as exchange rate realignment and changes in asset values ​​contributed to a slight increase in China's foreign exchange reserves.

Since the beginning of this year, despite the imbalance in the foreign market and quite significant uncertainty, the Chinese economy has maintained an overall stable and sustainable development dynamics, and favorable trends have been observed. The country's foreign exchange market has become more stable, cross-border capital flows through main channels have been optimized, which has become a solid basis for the stable growth of foreign exchange reserves.

Looking ahead, it is clear that the global political and economic situation will deteriorate, there will be greater uncertainty, the economy will continue to face pressure, asset valuations will continue to be high, and international financial market volatility may be expected to increase. However, the Chinese economy will continue its healthy development. As the exchange rate flexibility of the Chinese yuan increases, the function of an “automatic stabilizer” of the exchange rate gradually emerges, which generally ensures the stability of China’s foreign exchange reserves.

Opinions

Huang Maoxing, Dean of the Faculty of Economics, Fujian Normal University:

In conditions of international financial instability, gold acts as an international reserve currency; increasing its reserves is an important way to maintain the stability of a country's foreign exchange reserves. Currently, China has very large foreign exchange reserves, the volume of which has already exceeded three trillion dollars. In such a macro-financial situation, an increase in gold reserves can, on the one hand, strengthen the Chinese yuan market, and on the other hand, contribute to increasing the stability of the currency.

In 2021, China's total economy surpassed 90 trillion yuan for the first time. For an economic power such as China, with an increase in a certain stock of gold reserves, the corresponding proportional relationship with the total volume of the country's economy and foreign exchange reserves is maintained, which actually helps to strengthen the financial policy of the state as a whole, especially monetary and fiscal policy. It can be said that the gold reserves of any country are closely related to its foreign exchange reserves, macro policies and the overall size of the economy.

In the past, people made transactions with each other through the mutual exchange of gold and diamonds. This form of exchange has existed in society since ancient times. Until now, gold has been both a reserve currency and a circulating currency. The further attraction of gold for transactions is questionable; for different groups of the population, gold performs different functions: gold has a storage cost, wear and tear cost, investment cost and circulation cost. As income levels rise, people begin to strive for a better standard of living, and the demand for such “expensive things” as gold will increase, and accordingly the tendency to accumulate gold will become more and more obvious. On the other hand, gold is a non-renewable resource and its rarity makes it extremely expensive, making it impossible to determine its investment value.

Liu Huihao, director of the Institute of Finance, Zhongnan University of Economics and Law:

Despite the fact that gold has already been monetized, all countries of the world have always considered gold an important part of the allocation of international reserve assets. When talking about the structure of government reserves, it is worth taking into account the corresponding increase in gold reserves and the regulation of the structure of China's international reserves.

© RIA Novosti, Vitaly Ankov | Go to photobank Eastern Economic Forum. Second day

Among the international reserve assets of a state, gold reserves mean monetary gold, which is an important component of international reserves. When New China emerged, the country's gold reserves were not large, with significant increases occurring only after the reform and opening-up policy, and the country has now steadily strengthened its position in total gold reserves in the world, currently ranking sixth. But in general, speaking of the US, Germany and other countries, there is still a fairly large gap between them and China.

A country's international reserves consist mainly of four parts: foreign exchange reserves, gold reserves, reserve position in the IMF, and special drawing rights (SDRs). The reserve assets that a country can control are actually gold and foreign currency. Currently, China still holds over three trillion dollars in foreign exchange reserves. Gold makes up only 2.57% of foreign exchange reserves. Foreign exchange reserves are loanable money that can be affected by fluctuations in exchange rates, too much fluctuations can contribute to greater exchange rate risk.

From the point of view of the structure of China's international reserves, it is possible to optimally increase the proportion of gold reserves and correspondingly reduce the proportion of foreign exchange reserves.

On the other hand, gold now does not have the properties of a currency, but still has currency attributes and the ability to hedge risks. It is enough that, for example, instability in the value of the main international reserve currencies arises in the international financial market, and then everyone will start buying gold, so its ability to preserve value is still recognized by many.

In addition, gold has always served as an important support in the process of internationalization of currencies that took place in the United States, England and other countries. From the point of view of the internationalization of the Chinese yuan, the current share of the Chinese yuan in the international market is still small, and the share in international payments and international reserves continues to be quite low. With the help of the gold reserve, we should promote the internationalization of the renminbi, since the gold reserve is one of the important forces that will help make the renminbi an international currency.

InoSMI materials contain assessments exclusively of foreign media and do not reflect the position of the InoSMI editorial staff.