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Beijing is gradually reducing its stocks of US Treasury bonds, in which it actively invested. China has reduced its assets by $88 billion over the past 14 months. Instead, Beijing continues to expand its purchases of gold.
It seems China finally decided to cut some ties to the world’s largest reserve currency – United States dollar, at least if it’s to believe the analysts’ prognoses.
The biggest and most obvious reason is the ongoing trade war between the two countries said ANZ Research in their recent report. US delisting Chinese companies’ stocks from its market – surely hasn’t helped as well. That is why, ANZ predicts, Beijing decided to diversify its foreign exchange reserves into other currencies as well.
The report says that even though China still holds a huge percent of its FX exchange reserves to the USD, it will probably speed up the pace of diversification into other currencies. The company added that the share of the dollar in the Chinese foreign exchange reserves was said to be around 59% as of June.
As per CNBC’s report, ANZ believes that other probable currencies that will found their space in the new portfolio could include the British pound, Japanese yen, and euro.
At the same time, Beijing is slowly decreasing its holdings of US Treasurys, which it is heavily invested in before. Let’s not forget that China was the largest holder until June (when it held $1.11 trillion of US debt), when it was beaten by Japan. Allegedly, China has reduced its holdings by $88 billion in the last 14 months.
At the same time, the country went on shopping for gold and as per October reports, it had 1,957.5 tons in its reserves. That could mean the end for the price decrease of this precious asset since, at the time of writing, it was falling 0.63% selling for $1,458.47 per ounce. Just for reminder, the price decreased because of the optimism regarding the possible end of the phase one of the trade war.
Pinebridge Investment’s global economist Paul Hsiao claims that Chinese companies are also highly exposed to moves in the US dollar. He said:
“Much of that is in US dollars, which can be a problem for Chinese corporates. Diversifying its currency holdings, in a way is very much in line with the recent political moves of the Xi administration to focus on China’s trade relationships beyond just the United States. China and, more broadly, the Asian region is still highly exposed to movements in the US dollar.”
Be it as it may, another way of how China could manage that risk is by filling up its portfolio with other forms of assets so-called “shadow reserves.”
According to ANZ analysts, during recent years, China has been increasing its stakes in alternative investments, and “much of that is through several investment vehicles such as its state-owned companies and banks, as well as through funds co-managed with other countries.”
The analysts added that among those investments are also equities and issuing loans through its state-owned banks – especially for its huge Belt and Road initiatives.
China’s State Administration of Foreign Exchange (SAFE), which manages China’s foreign reserves, has four investment entities: Huaxin in Singapore, Huaou in London, Huamei in New York, and Hua’an in Hong Kong. They are allegedly connected with other offshore venues that invest in equities as well. As per the report:
“These offshore investments, called China’s shadow reserves, amounted to USD1.86 (trillion) in historical value as of June 2019.”
S&P Global Ratings’ APAC chief economist Shaun Roache said:
“The global financial system is highly U.S. dollar-centric and the larger economies, including China and the euro area, have been keen to move to a multi-polar reserve currency world. For China, this would help reduce reliance on U.S. dollar financial conditions and, over time, provide more room for the renminbi to play a larger global role.”
However, we shouldn’t forget one more important instance of the whole story. It is cryptocurrency and even though China still hasn’t revealed its own cryptocurrency (which is predicted to be done by the end of this year), in October this year, Chinese President Xi Jinping urged the country to accelerate the adoption of blockchain technologies. In the future, the country with higher technological superiority will dominate global trade and commerce.
Last week, Xinhua, a state-run newspaper in China published a front-page story praising Bitcoin as the first successful application of blockchain technology describing it as “one of the hottest topics in recent years”. Bitcoin is since then relatively flat staying around $8,600 and at the time of writing it was rising 0.14% to $8,603.