Does China have enough US dollars to survive the US trade war?
- China’s US$3.1 trillion in foreign exchange reserves may not be sufficient to support a crisis in the economy, analysts say
- Authorities have kept foreign reserves stable at around US$3.1 trillion since burning through almost US$1 trillion between mid-2014 and 2017 to defend the yuan
This is the first article in a three-part series looking at China’s US dollar shortage risks amid the trade war with the United States as it plans to reform and internationalise its economy.
The Chinese government is officially sitting on the world’s largest stockpile of foreign exchange reserves, but it has been scrambling recently to block backchannels for capital outflows as trade tensions with the United States increase.
Beijing’s increasing scrutiny of the usage of the US dollar by Chinese companies and individuals, in the absence of any immediate signs of a financial crisis, along with accelerating efforts to lure in foreign capital, have raised suspicions among analysts that the world’s second-largest economy is worried about the risk of running short of the US dollar.
On the surface, China should be the last country in the world to worry about a shortage – about two-thirds of its US$3.1 trillion worth of foreign exchange reserves, the world’s largest, are believed to be held in US dollar-denominated assets.
But the huge foreign reserves and a relatively stable currency do no reflect the true stresses underlying the economy, analysts said, because the concerns are that those reserves may not be enough to provide the safety buffer needed to pay for China’s imports and pay off its debt in adverse circumstances if the yuan faced a devaluation or a sharp drop in value.