One of the biggest media-constructed fallacies is that China can threaten the US by dumping its enormous holdings of US dollar-denominated assets.
China does have $2 trillion of foreign exchange reserves, and a large chunk of this is US government debt, but this doesn’t mean China can bully the US. If anything, it is in the weaker position.
The foreign exchange reserves come from the proceeds of Chinese exports to the rest of the world. Since China wants to keep the value of its own currency fixed, in order to help its firms remain competitive globally, it cannot allow this money to be converted into renminbi. If it did, the value of the renminbi would soar and China’s export industry would be ruined. Tens of thousands of jobs would go.
So it has to keep it in a foreign currency, and the only choice, really, is dollars. If China chose to put it in euros, pounds or yen, it wouldn’t be very long before it inflated the value of those currencies tremendously, causing untold economic damage.
In short, if China wants the world to keep buying its goods, it has to buy a corresponding quantity of dollars. In recent weeks, the markets have been jittered by US Treasury data suggesting that China is now exiting its dollar holdings rapidly. According to the Treasury International Capital System report for December, China sold off $34 billion of Treasury bills.
However, the overall sum of China’s foreign exchange reserves continued to increase. This looked odd to Stephen Green, an economist at Standard Chartered, and he looked into it. What he has decided is that China was actually using intermediaries in London and possibly Hong Kong to make more purchases of T-bills, but that since the monthly data only reflects where the trade was booked, these buys didn’t show up.
The State Administration of Foreign Exchange (Safe) has said as much, explaining to the Economic Observer that the reported data does not reflect reality. Mr Green reckons that 90% of Treasuries bought in London are by China, so there’s no need to panic. Even if China was technically able to sell off its US Treasuries, it hasn’t done so.