ANZ analysts suggest that the ongoing trade war and geopolitical issues have increased the risk of a financial decoupling between China and the US.
Key Quotes
“Although China still allocates a high share of its FX exchange reserves to the USD, estimated at around 59% as of June 2019, the pace of diversification into other currencies will likely quicken going forward.”
“In fact, we believe that the Chinese government has already discreetly diversified its offshore portfolios to include alternative investments. We estimate that other forms of sovereign wealth likely amounts to CNY1.8trn as of June 2019. Since the assets held are mostly in the form of equities and entrusted loans in Europe as well as countries involved in China’s ‘Belt and Road’ initiative, the share of USD in China’s sovereign portfolio should be lower than that in China’s FX reserves.”
“China has been a major contributor to the global savings glut. The excessive savings have led to huge capital flows towards US households at low interest rates. Furthermore, China has invested a significant amount of the earnings from its manufacturing exports into US government bonds. The above trends, which we nickname “factory-dollar recycling”, have contributed to the global prominence of the USD over the past decade. However, if China initiates a convertible standard superior to the fiat money regime, not only will it gain a market following, but it will also boost the global acceptance of the RMB.”
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