Don’t Worry, China Won’t Dump the Dollar
A cursory scan of the last three months of financial media might give one the impression that China is preparing to cut its ties to U.S. Treasuries and the dollar. Between the renminbi’s recent devaluation – driven by net capital outflows, not intervention – and reported declines in Chinese purchases of U.S. Treasuries late last year, it is hardly surprising to hear voice given to fears that China could “dump the dollar.” Analysts worry that China is beginning a process of unwinding its $1.3 trillion holdings of U.S. Treasuries to further its aims of internationalizing the RMB and limiting its financial interdependence with the U.S. If true, this process would increase borrowing rates for the U.S. government, disrupt the global financial system by undermining faith in Treasuries and the dollar, and perhaps even lead to rising tensions between the U.S. and China by eliminating an important source of mutual interest.
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