Coronavirus: China refuses to be beholden to US dollar even as pandemic creates shortage

A shortage of US dollars created by increased demand during the coronavirus pandemic threatens Chinese companies’ ability to raise new funds to pay off existing debts

The US Federal Reserve has expanded its US dollar swap lines to 14 central banks, but not the People’s Bank of China

5-MIN READ5-MIN

The US Federal Reserve expanded its US dollar swap lines to 14 central banks from five previously, but China, along with Russia and Turkey, were not included. Photo: Bloomberg

Published: 5:00pm, 17 Apr 2020Updated: 10:38pm, 17 Apr 2020

China is reluctant to project an image to the international community that it needs the United States to provide it with easier access to US dollars, even though the coronavirus pandemic has created a shortage of the currency needed by non-American companies to pay their bills, analysts said.

The US, in turn, is in no hurry to help China solve its economic problems, given the escalating rivalry between the world’s two largest economies.

The result is that if a US dollar shortage in the global financial system continues, and there is no reciprocal currency arrangement – a so-called swap line – between the Chinese and US central banks, it would raise the prospect that China could have to tap into its massive foreign exchange reserves to help pay the nation’s foreign bills.

The US Federal Reserve has unleashed a fresh flood of US dollar liquidity since the beginning of March to keep its economy from suffering lasting damage from the coronavirus pandemic. This included launching aggressive interest rate cuts and a series of nine new initiatives to pump money into the economy.

But the moves have underlined the difficulty that many foreign governments and companies are having in paying bills and repaying debts denominated in US dollars. In times of a crisis they increasingly need to rely on the US to provide them with the US dollars they cannot create, thus granting the US enormous power and privilege, analysts said.

Beijing does not want to be beholden to the US and receive an infusion of US dollars that would look like a US bailout and which could come with implicit political strings attached, according to Michael Every, global strategist at Rabobank.

In turn, the US does not want to be seen giving aid to save Chinese firms, especially since the White House openly describes China as a “strategic rival” and is pushing firms to move production back to the US, Every said.