China Must Dedollarize Forex Reserves to Reduce Risks

Economists have assessed China's standing in the current international geopolitical situation, declaring their concerns about the level of reserves held in U.S. dollars.

Economists have highlighted concerns regarding China's vast forex reserves, particularly those held in U.S. dollars, amidst potential risks arising from anticipated measures by the upcoming U.S. president, such as tariffs or unilateral sanctions.

China urged to reduce risks of holding over $3.3 trillion in forex reserves

Economists have assessed China's standing in the current international geopolitical situation, expressing their concerns about the level of reserves held in U.S. dollars. According to recent reports, Zhang Ming, deputy director of the Chinese Academy of Social Sciences' Institute of Finance and Banking, has called for a pivot in the management strategy of China's forex reserves, which currently stand at over $3.3 trillion.

In a recently published article, Ming stated:

"The management of these reserves faces significant challenges in maintaining and increasing their value. Particularly, China must address the financial risks associated with possible future sanctions from the U.S."

These concerns have been amplified by the upcoming U.S. presidential election, with economists expressing fears that a new president may take measures that could impact the stability of these reserves. While China has not disclosed recent statistics on the composition of its forex reserves, U.S. dollars reportedly accounted for 55% of the reserves in 2019.

Russia has been subjected to unilateral U.S. sanctions for its involvement in the Ukraine conflict, with the European Union and the U.S. freezing over $300 billion in Russian assets. Furthermore, in April, U.S. Treasury Secretary Janet Yellen hinted at the enactment of similar sanctions if China dared to act against Taiwan. "I think you should not doubt our ability and resolve to do the same in other situations," she stressed.

China and Russia, as members of the BRICS bloc, have been dedollarizing their exchanges, settling the majority of their payments in national currencies. In July, President Putin stated that over 80% of the Russian-Chinese turnover involved national currencies.

Read more: Putin on Dedollarization: 80% of Russia-China Trade in Rubles and Yuan

China has been gradually reducing its exposure to U.S. treasuries, decreasing its holdings from over $1,300 billion to less than $800 billion, with the steepest decline occurring between 2021 and 2023. This leaves Japan, a natural U.S. ally, as the largest holder of these papers.