China may use foreign exchange reserves to fight US financial war risk, analysts say

The People’s Bank of China has maintained the world’s biggest pile of foreign exchange reserves at a stable level of around US$3.1 trillion in recent years

But it now may consider a more defensive stance, such as supporting the yuan’s exchange rate, as the tensions with the United States spread to finance

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Last week, the administration of US President Donald Trump designated China as a currency manipulator after the yuan’s value fell below the key level of 7 to the US dollar. Photo: AP

Published: 6:30pm, 14 Aug 2019Updated: 10:59pm, 14 Aug 2019

As the United States widens the conflict with China into the realm of finance, raising the possibility that Washington will use the US dollar payment system as a weapon, analysts are wondering whether China will shift how it uses its US$3.1 trillion in foreign exchange reserves in anticipation of extreme financial volatility.

China, analysts said, may consider preparing itself against a possible US financial attack by shifting towards a more defensive stance, such as using its foreign exchange reserves to support the yuanâs exchange rate while diversifying its investments out of US dollar assets to limit exchange rate and financial market risks.

The Peopleâs Bank of China (PBOC) has maintained the worldâs biggest pile of foreign exchange reserves at a stable level of around US$3.1 trillion in recent years thanks to the countryâs capital controls, providing confidence and stability to its financial and economic systems. But memories are still fresh after the central bank was forced to burn through US$900 billion of its reserves from mid-2014 to 2016 to defend the sliding yuan as the equity markets crashed.

âCurrently, foreign exchange has already become a target of the US to launch trade attacks or financial warfare,â said Chen Yuan, former chairman of the China Development Bank, the countryâs biggest policy lender. Therefore, we should consider shifting strategic thinking on foreign exchange reserves, from being our national wealth to becoming the focus of a financial battleground.â

According to Chen, the US wants to see the decoupling of the financial markets and exchange rates of the two countries, which could lead to unexpected risks to Chinaâs US dollar reserves and yuanâs exchange rate, which in turn, could result in even larger economic damage to China.