China Accelerates Global De-Dollarization

China Accelerates Global De-Dollarization

Peter Reagan

China’s U.S. Treasury holdings recently fell to 14-year low of $859 billion.

According to a recent South China Morning Post explanation, this is not an accident – but rather a deliberate policy decision:

Reducing investments in Treasuries, a key component of Chinese foreign reserves, has been widely seen as among Beijing’s efforts to diversify its portfolio, lower dependence on the U.S. dollar while promoting the broader international use of the Chinese yuan and guard against the risk of sanctions, such as those imposed on Russia for its invasion of Ukraine.

The declining Treasuries investment is also read as a sign of Beijing’s unease with Washington’s financial policies. [emphasis added]

China’s hoard of U.S. Treasury bonds has slumped by a shocking 35% since July 2017.

Note: Why does this matter? 

Although the federal government sometimes seems to forget this, multi-trillion-dollar budget deficits have to be financed by somebody. 

Every year since 2001, the federal government has spent more money than it’s collected. In order to finance the spending, the Treasury Department issues IOUs called Treasury bonds and sells them on the open market. Individual investors and nations, from Albania to Vatican City, buy them. And the government finances deficit spending with their cash.

This is a story about China, one of the federal government’s biggest creditors, deciding that maybe U.S. government IOUs aren’t such a great investment after all.

Why? China Daily is happy to explain:

…fading attractiveness of dollar assets as radical monetary tightening by the U.S. Federal Reserve has pushed down prices of U.S. government bonds and led to rising financial fragility, as seen in the recent failure of Silicon Valley Bank.

“This is an ongoing reduction of China’s U.S. treasury portfolio and part of China’s reserve management,” said Hong Hao, chief economist at GROW Investment Group.

“I wouldn’t be surprised to see this trend continuing, as a reflection of weakening US asset safety and its losing performance since last year,” Hong said, adding that China is not the only economy that has reduced U.S. debt holdings. [emphasis added]

Key takeaways:

• The Fed’s rate hikes reduce the value of existing U.S. bonds
• China’s not alone in reducing U.S. bond holdings

Yang Haiping, a researcher at the Central University of Finance and Economics’ Institute of Securities and Futures, added another reason:

…reducing holdings in U.S. Treasurys may become a necessity for China to ensure foreign exchange reserve safety.

In other words, President Biden’s decision to freeze Russian assets have, exactly as I warned, led to every other nation rethinking their reserves. If your assets can be frozen by the U.S. government at any time, are they really yours?

These political considerations, while interesting, aren’t really applicable to everyday folks like you and me.

However, there’s another major incentive for China, and the rest of the world, to dump their dollars right now – and it’s even more relevant for you and me.

The dollar’s dwindling purchasing power is fading even faster

The dollar’s purchasing has plunged since 1913 (the year the Federal Reserve was officially instituted as the central bank of the U.S.).

If you’re a regular reader, you know this all too well.

I still find this chart quite shocking:

Every dollar in the world has lost 96.7% of its purchasing power – good work, Federal Reserve!

Since central banks tend to be the ultimate buy-and-hold investors, they have to take a long-term perspective. Since China’s U.S. Treasury holdings peaked in 2013, their dollars have lost 23% of their purchasing power simply due to the Fed’s inflationary money-printing.

Just to be perfectly clear, the same is true for our dollars – my cash and yours.

Let me ask you – why would anyone want to hold U.S. dollars for the long term?

Well, for global central banks, they have to – so long as the dollar is the global reserve currency, they need a ready supply of dollars for importing and exporting goods and services.

This “perfect storm” may “end of the U.S. dollar”

Recently, former Assistant Treasury Secretary Monica Crowleyclaimed that President Biden’s fiscal policies have damaged America’s economic dominance and threatened the dollar’s global reserve currency status.

She explained that a “perfect storm” of global economic trends spell the “end of the U.S. dollar.”

Reuters reported that de-dollarization picked up pace last year:

The dollar is the world’s top reserve currency. Analysts say using it as a financial weapon is likely to accelerate a move already under way by many countries to diversify investments into alternative currencies.

For example, Russia’s prohibition from the global dollar banking network simply created a vacuum that China was delighted to fill:

China is all too happy to assist Russia in this process. Beijing has a longer-term goal of competing with the dollar and of advancing the yuan as an international currency. Russia will be a test case as the first large economy to embrace the yuan in this way. With the power dynamic in the relationship strongly tilted in China’s favor, Russia’s urgency will permit the People’s Bank of China to experiment with financial and monetary policies in a controlled environment while easing the yuan into a more international role.

The Russian people don’t care whether importers pay for goods with yuan, rubles or Thai baht – as long as those goods keep flowing into the country, they’re happy. The Russian government is happy to do business with China, India, Turkey – anyone who’s willing to work with them.

In fact, just about every nation is currently seeking alternativesto the U.S. dollar (a process called “de-dollarization,” or what I like to call “dumping the dollar”):

• Recently Brazil and Argentina have discussed the creation of a common currency for the two largest economies in South America.
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• In a conference in Singapore in January, multiple former Southeast Asian officials spoke about de-dollarization efforts underway.
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• The United Arab Emirates and India are in talks to use rupees to trade non-oil commodities, according to Reuters.
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• For the first time in 48 years, Saudi Arabia said that the oil-rich nation is open to trading in currencies besides the U.S. dollar.

Brazil wants to dump the dollar for good:

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