Yes Virginia, The Chinese CAN Dump The Dollar
by Aaron Krowne
I’m surprised how persistently I see the dubious assertion that the Chinese “can’t move away from the dollar because they own so many of them”. A related argument is that they are “stuck in dollars because of the trade deficit”. They certainly can move away from the dollar, though, by continuing to do what they are already doing. This will bring them to a point where they will be positioned to transition away from the dollar, possibly rapidly. Here is what I mean.
Assume China has $2 trillion in total dollar reserves. By “dollar reserves” I mean mostly Treasury securities (Treasuries) and to a lesser extent Agency securities (Fannie and Freddie) and cash dollars. However, for the purposes of this discussion, they will be considered one and the same, and can just be called “Treasuries”.
At the same time many observers are closely watching the US-China trade balance, and China’s purchases of Treasuries, we know the Chinese are buying gold and every sort of natural resource they can get their hands on around the globe. Some of this is public, but probably not all (maybe not even a majority). Yet, those pointing to China’s holdings and accumulation of dollars rarely mention it.
This can be considered “cashing out” of the dollar, in a sense. As for the current level, I’d be surprised if they’ve even “cashed out” $500 billion worth of their dollar holdings–or about a quarter of the total assumed here.