Amid a flurry of assessments that China's "de-dollarization" is accelerating in global financial markets, an analysis says China is in fact mobilizing state-owned banks to scoop up dollars on an unprecedented scale.
Brad Setser, an economist at the Council on Foreign Relations (CFR) and a prominent economist, wrote in a contribution to the Financial Times (FT) that "we should not be fooled by the People's Bank of China's official foreign-exchange reserve figures." He said China bought more than $100 billion in foreign exchange in December alone and purchased roughly $70 billion more in dollars in January. That is the largest monthly scale of currency intervention on record.
He noted that on the surface the People's Bank of China's foreign reserves have not increased much, explaining that the reason is the actual dollars have moved onto the balance sheet of state-owned commercial banks. Instead of increasing official reserves, China is opting to store dollars in the "warehouse" of state-owned commercial banks.
Recently, Chinese exporters, expecting yuan appreciation, have been selling dollars and moving to secure yuan. Some interpret the decline in China's holdings of U.S. Government Bonds as evidence that de-dollarization is under way. In fact, China's holdings of U.S. Government Bonds kept at custodians in the United States have decreased. However, the view is that this is largely an accounting shift driven by adjustments in the share of dollar asset holdings or greater use of non-U.S. custodians.
Setser stressed that the drop in China's U.S. Government Bonds holdings is merely a technical adjustment due to asset diversification or changes in custodians, and does not mean overall external asset accumulation has stopped. In reality, a sizable portion of the foreign assets held by state-owned commercial banks is estimated to be dollar assets. He analyzed that as long as China maintains a current account surplus and sticks to an export-centered economic structure, it will be difficult to break completely from dollar assets. So long as it manages the yuan by linking it to the dollar and prefers a relatively weak currency to preserve export competitiveness, it will have to keep absorbing the dollars flowing into the market.
He added, "the dollar hasn't disappeared; only its apparent location has changed."