George Magnus is an Associate at the China Center at Oxford University, a SOAS Research Associate, and author of red flags: Why Xi’s China is in danger.
De-dollarization is a scary word that is chronically overused to describe things that aren’t really happening much. However, it is all the rage as people go back to looking for simple narratives in volatile and highly geopolitical times.
FT Alphaville made one of the most reasoned expositions here but even that, from seasoned currency analyst Stephen Jen, failed to convince. Here’s why.
We can all agree that some central banks in the past have withdrawn significant proportions of their US dollar reserves, for example China 2005-2015, and Russia, more recently, has run out of dollars and euros. But there has been no substantial evidence that the dollar’s reserve status as such is under threat.
There is no question that the weaponization of the dollar as part of creating a moderation infrastructure targeting Russia and China has made these two autocracies and some countries nervous and eager to try to financially shield themselves from sanctions, if is that this is so. possible. However, the suggestion that the decline in the dollar component of global reserves fell significantly faster (an additional eight percentage points according to Jen) in 2022 vindicates the notion of a global move away from the dollar as the main reserve asset. sought
If you want to get into the bowels of this salad of reservation statistics, you must Read Brad Setser at the Council on Foreign Relations. It shows that the fall in reserves, reported by the IMF and used by Jen, is primarily due to valuation changes in central bank bond portfolios as the Federal Reserve’s monetary regime change gained momentum. Also, it is quite common to see central banks do a bit of asset allocation outside of the dollar in the wake of periodic surges, such as the one from 2020 to September 2022.
Furthermore, neither the US balance of payments accounts data on official reserve assets nor those from the Treasury International Capital (TIC) system, which tracks portfolio capital flows into and out of the US. In the US, they indicate that there was something unusual in the last year. Flows into US Treasuries, agencies and other debt instruments continued to increase.
Is reported that the BoJ sold off more than $50 billion in its attempt to halt and reverse the yen’s slide last summer. To the best of our knowledge, there were no changes in China’s dollar reserve holdings, or at any major central bank that would have made a difference in the aggregate data.
It is also important to note that, in modern times, one cannot only observe the movements of central bank assets. The activities of sovereign wealth funds and state banks (particularly in China, but also elsewhere) are also key. The former typically have fewer portfolio assets and fewer dollars, but are not far behind in US debt markets, while the latter are often used as proxies for central banks to hide dollar reserve purchases . It is possible to incorporate these institutions using larger data sets than just the IMF, and again, they do not reveal de-dollarization in the way that its proponents claim.
Going back to the protection against sanctions and the pipers of China and Russia leading the world towards a monetary system in which the dollar is also lost, the reality is not exactly as they paint it, often selfishly.
Again, we can all recognize that there is a shift towards paying invoices in other currencies and trying to establish alternative payment and clearing systems that bypass SWIFT and the TIC system. The yuan’s share of Russia’s import and export deals during 2022 jumped to 23 percent and 16 percent, respectively, from 4 percent and 0.5 percent. China has set up emergency yuan swap lines with a few other central banks in a bid also to encourage more local currency trade financing that bypasses the US dollar. It is developing its own international payments. infrastructure it has also encouraged Saudi Arabia, other oil states and Brazil to finance more trade in yuan. Most of these equate to fairly small beer.
However, using the Chinese currency to pay more bills does not further the cause of the yuan as a reserve currency, let alone an alternative to the US dollar. Recipients of the yuan are still faced with the question of holding onto a monetary asset that is rarely used globally or selling it for easily tradable currencies with open and transparent financial architectures. Not to mention trust and other properties that fully internationalized currencies must have.
while the IMF has shown that the diversification of reserves in Australian and Canadian dollars and even in the Swedish krona and Korean won has been remarkable, these currencies should be considered as part of the orbit of the dollar-based monetary system. There really is no alternative as it stands, and the idea that the yuan could become a truly internationalized currency is a narrative that lacks credibility.
It could only happen if China allowed the rest of the world to accumulate large yuan claims, which would mean large sustained external deficits or free movement of capital outward. Neither does this mercantilist state, which also fears capital flight and threats to its own $60 trillion national banking system. Xi’s China is thus caught between the demon of balance of payments surpluses and the deep blue sea of a closed capital account.
If de-dollarization is really going to happen in the future, the United States will be the agent. But it’s not really happening now, even if the use of other currencies to settle bills and denominate swaps is becoming more popular and acceptable.
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