China has no serious alternative to Treasuries (bc the closest competitors have lower yields). Also, other countries don’t place themselves in the same group as Russia, bc they violated international norms in an extreme manner.
Someone should tell the Chinese that, because they've been a net seller of US treasuries for some time now. They are clearly at a minimum diversifying right now. I'm sure if you ask some people they will say "diversifying" isn't a strong enough word for the velocity of the changes we're seeing. "De-linking" is the popular word these days for what's going on. Truth, as always, is likely somewhere in the middle.
Obviously we can't see all that goes on inside China, but we have 100% visibility on what's happening with US treasuries. Regarding the whole picture, just from what is publicly reported, it certainly seems like China is betting on what appears to be, themselves. Maybe that's a good market in the future and they make out like bandits? Maybe it's a bad market and they take significant hits? Not really sure anyone can say with certainty right now?
If I was forced to bet, I'd say it will pay off, but not as big as they think. Probably big enough to not really need the West though. Which is a strategic win I suppose?
Good question on the USDCNY trajectory. I think it’s fair to assume that they manage this through capital controls rather than market forces, so the adjustment might play out differently than typical reserve diversification scenarios. The GDP growth question is the interesting one: are they trading some growth for strategic autonomy, or betting they can maintain growth through domestic consumption + non-Western trade? Probably find out in the next 5-10 years.
Thank you. If it's for strategic autonomy, it's a bad trade. China needs domestic consumption like you mention, to absorb their supply / keep people working. Weakening USD would make Chinese exports more expensive, esp. if they convert it to Yuan. Meanwhile there's a property crisis and they can stimulate demand, including for strategic autonomy. One devious possibility is just giving it to Russia. Repatriating it as Yuan to stimulate doesn't make sense to me.
The property crisis and domestic consumption issues are real constraints, but I think the framework's point is that the calculus has shifted even if the alternatives aren't great. China's treasury holdings peaked around $1.3 trillion in 2013 and are now closer to $750-800 billion.
You're right that repatriating as yuan for stimulus doesn't solve the structural issues. But Pozsar suggests the alternative isn't necessarily converting back to yuan, it's using dollar reserves to lock in commodity supply agreements or funding infrastructure that creates yuan-denominated trade flows. Strategic rather than economically optimal, but reduces exposure to assets that could be frozen.
Your "giving it to Russia" point is interesting because it addresses multiple objectives simultaneously: supporting an ally while converting financial assets into physical resources and geopolitical relationships. Whether that tradeoff makes economic sense long-term idk.
