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Is China dumping U.S. dollars? Here’s what experts say

Is China dumping U.S. dollars? Here's what experts say
Elmaz Sabovic

As the trade war between China and the U.S. rises to the next level, with President Joe Biden increasing the tariffs on EVs up to 100% and semiconductor parts up to 50%, Beijing decided to retaliate with the offloading of U.S. securities such as Treasuries, and agency bonds.

This move rounds off the divestment from U.S. assets to a record $53.3 billion in the first quarter, in a move seen as the next step in the ongoing tariffs war between the two of the world’s largest economies.

China's offloading of Treasury and US Agency debt hits record levels. Source: Bloomberg
China’s offloading of Treasury and US Agency debt hits record levels. Source: Bloomberg

If Donald Trump becomes president, the situation might worsen

In his presidential election campaign, former U.S. President Donald Trump highlighted the importance of tariffs on Chinese goods greater than 60%, in a move that wasn’t well-received by Wall Street, which sees such increases as disruptive to the ongoing boom in the stock market.

China has increased its gold holdings in response to potential risks. As of April, the precious metal made up 4.9% of its official reserves, the highest level since 2015, according to central bank data.

China's rising gold reserves. Source: Bloomberg
China’s rising gold reserves. Source: Bloomberg

Since 2015, China and its allied countries have boosted their gold reserves, while nations aligned with the U.S. have maintained stable levels. 

China is probably reinvesting the U.S. dollars in other assets

In a note released on May 22, stock market research company Yardeni Research highlighted the ongoing ‘de-dollarization’ strategy in China, arguing that the most populous country on Earth is simply relocating its previous holdings of U.S. treasuries into other forms of investment.

The presence of Chinese holdings in Belgium’s Euroclear and possibly in Luxembourg’s Clearstream or the UK indicates a strategy of diversification rather than a complete exit from U.S. debt.

Although China is purchasing gold, it’s still being determined if these buys are financed by selling U.S. assets. Yardeni Research concludes that there is a minor threat to the dollar’s dominance, as it remains strong and in high demand globally.

U.S. dollar hegemony is still strong

New York Federal Reserve Bank economists Linda Goldberg and Oliver Hannaoui analyzed countries’ geopolitical alignment with the U.S. through their UN voting patterns. They found a weak correlation between voting alignment and the share of U.S. dollars in foreign exchange reserves. Surprisingly, many countries with low U.S. alignment or under U.S. sanctions hold higher dollar reserves.

They noted that countries with low U.S. alignment and sufficient reserves for short-term needs are more likely to reduce their dollar holdings. This aligns with a 2022 IMF study showing reserve managers seeking higher yields by holding smaller, non-traditional currencies. 

Despite this trend, the dollar’s dominant role in global trade and finance ensures it will remain the main reserve currency, though geopolitical tensions may gradually reduce its dominance.

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