US-China decoupling: is Beijing ramping up its diversification away from the US dollar?

Name: China GDP: economy grew by 4.9 per cent in third quarter of 2020
Uploaded: 2020-10-20T16:00:24.000Z
Duration: 1 min 47 s
Description: China GDP: economy grew by 4.9 per cent in third quarter of 2020

US-China frictions and the threat of American financial sanctions have renewed debate in Beijing about reducing dependence on the US dollar

China cut its holdings of US government debt to US$1.07 trillion in late August, the lowest level since March 2017, the US Department of Treasury says

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China has long tried to undermine the US dollar’s dominant role in the international monetary system, despite the fact that the bulk of its reserves are in dollar-denominated assets. Photo: Reuters

Frank Tang

Published: 12:00am, 21 Oct 2020Updated: 9:19am, 23 Oct 2020

China may be speeding up the diversification of its foreign exchange reserves away from US dollar assets in response to potential American financial sanctions, but there are clear limits on how far it can go in its de-dollarisation push, according to analysts.

China has long tried to undermine the US dollar’s dominant role in the international monetary system, despite the fact that the bulk of its reserves are in dollar-denominated assets.

But amid fast deteriorating bilateral ties with the US, including the threat of financial sanctions, debate about reducing dependence on the world’s largest reserve currency has taken on new urgency in China.

Beijing cut its holdings of US government debt for three consecutive months to US$1.07 trillion in late August, the lowest level since March 2017, according to data from the US Department of Treasury.

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China GDP: economy grew by 4.9 per cent in third quarter of 2020

The State Administration of Foreign Exchange (SAFE), China’s foreign exchange regulator, does not publish information on reserve holdings because it is regarded as a state secret.

However, the agency said in its most recent annual report that US dollar assets accounted for 58 per cent of reserves in 2015, unchanged from a year earlier.

If China has maintained the same spread since then, US dollar assets would account for about US$1.8 trillion of China’s total reserves of around US$3.14 trillion, according to calculations by the South China Morning Post.