The Platform

Photo illustration by John Lyman

For a number of reasons, Beijing is hoarding U.S. greenbacks. Here’s why that’s a problem.

China’s application for WTO membership in 1995 was a complex affair and was met with opposition from several European countries. This could be attributed to their apprehension about the Chinese government’s practice of showering businesses with incentives instead of taking legal action against infringements. Notably, Bill Clinton, the U.S. president at the time, stood in China’s defense, placating the disgruntled European nations. Little did Clinton know that in the span of 20 years, China would become the global economic powerhouse that it is today.

In a span of 70 years, China has transformed from a relatively impoverished and underdeveloped nation to one of the world’s most formidable economic powers. The People’s Republic of China was founded in 1949, following a brutal civil war. Since then, China has amassed remarkable wealth and enacted several ground-breaking reforms in its socialistic market economy, thus expanding trade and investment opportunities. Yet, the primary concern of central planners in Beijing isn’t necessarily global mutual benefits, but rather their own self-interests.

Surprisingly, China has been accumulating dollars in its reserve for the past 20 years, a move that has caused a depreciation of the yuan. While this helps manage China’s burgeoning export and manufacturing sectors, it has led to a massive stockpile of trillions of dollars in reserves. These funds are primarily used to purchase dollar-dominated debt and U.S. Treasury bonds. Despite geopolitical tensions, Beijing and Washington exhibit a symbiotic economic relationship. As per January data from the U.S. Department of Treasury, China is the second-largest holder of U.S. bonds after Japan. Furthermore, according to the Office of the United States Trade Representative, in 2022, the U.S. imported goods and services worth $536.3 billion from China, marking the highest import volume from a single country.

Between 1990 and 2000, China’s economy underwent a significant shift, evolving from an importer to a major exporter. Initially, China artificially inflated its currency to stimulate imports. However, in the 1990s, the Chinese Communist Party recognized the benefits of a devalued currency. As a result, China now reigns supreme in the export market, courtesy of its devalued yuan, which bolsters the nation’s manufacturing sector. Consequently, China has accumulated a sizable trade surplus, fueling international demand for Chinese goods. Despite the expectation that the increased demand for Chinese goods and the concurrent rise in the value of the yuan would balance out the trade surplus, China continued to devalue the yuan, aiming to further expand its manufacturing and export industries.

In order to accommodate these surplus resources, China printed more yuan, raising concerns about inflation. China’s central bank, however, pressured commercial banks to curb lending, thereby containing inflation. China then utilized these funds to purchase U.S.-dominated financial assets, creating a precarious economic balance between the two countries.

China has long been dependent on the U.S. for its exports, while the U.S. needs China to convert its dollars into bonds. Post-2008 recession, the U.S. discovered it could manage the deficit independently by printing more dollars (through quantitative easing) without causing significant domestic inflation. Yet, China’s financial maneuvering continues to pose challenges for the U.S., particularly given the dramatic expansion of the central bank’s official reserve since 2010. It’s also speculated that China may be hiding another $3 trillion in semi-official banks and agencies.

If the dollar’s value starts to decline and the U.S. Federal Reserve lowers interest rates, demand for yuan to replace dollars in Chinese reserves will rise. If the funds stored in Chinese banks and agencies were suddenly withdrawn, it would pose a threat to the global economy. Consequently, both currency devaluation and dumping could accelerate, potentially triggering cataclysmic changes in the global economy. Nevertheless, China appears to be taking steps to address this issue by significantly increasing its gold reserves, a safe-haven asset amidst geopolitical and economic unrest. According to a May survey by the World Gold Council, over the next five years, 62% of central banks anticipate that gold will make up a larger portion of reserves while dollar reserves are expected to decrease.

To safeguard the global economy, China must take a more transparent and responsible approach to managing its foreign reserves. Instead of indiscriminately accumulating dollars and other assets, the Chinese government should engage in open dialogue and cooperation with other major economies, working towards a more balanced and sustainable global financial system. China’s strategy of hoarding dollars may serve its economic interests, but it places the global economy at significant risk. The health and stability of the global economy will hinge on finding a balanced approach between reserve diversification and cooperative economic policies. As we move forward, our collective focus must remain on cooperative efforts to address the world’s fiscal crises and create a more robust and integrated financial landscape for future generations.

S.M. Sayem is a Dhaka-based foreign policy analyst studying Economics at the University of Chittagong.