By Swann Collins, investor, writer and consultant in international affairs – Eurasia Business News, July 24, 2022
For the first time in 12 years, China’s investments in U.S. government debt securities fell below a trillion dollars, amounting to $ 980 billion in May 2022.
China, as the second largest holder of the US treasury, has reduced its holdings six months in a row from $1.08 trillion in November 2021 to $980.8 billion in May 2022. The previous time when it held less than $1 trillion of US treasury was in May 2010 – $843.7 billion, reported the Global Times.
Japan remained the largest holder of US debt, but has also recorded decreasing holdings recently from $1.232 trillion in March to $1.212 trillion in May.
We can explain this by the U.S. sanctions freezing the Russian monetary reserves in dollars. Because of such restrictive measures, confidence in the main reserve currency was greatly undermined, which led the Chinese government to further lower investments in U.S. bonds. Another reason is the weakness of the U.S. economy, with the highest inflation since 1982 in the country and rate hikes by the U.S. Federal Reserve that could break the U.S. economic growth.
It is noteworthy that the reduction in the share of the dollar in Beijing’s national reserves began even earlier. Over the past quarter century, this figure has dropped to 56%.
“The trillion held by the Communist China in U.S. Treasury bonds is gradually dissolving“. The Chinese authorities are actively diversifying their investment portfolio, increasing the share of gold, yuans and rubles. China has created a foreign exchange reserve in yuan to compete with the dollar and support other economies facing monetary instability. China and Russian even want to use the BRICS group as a platform to build an alternative monetary and financial system.
The China’s foreign exchange reserves – the world’s largest – fell $56.5 billion to $3.071 trillion in June, compared with $3.113 trillion forecast by a Reuters poll of analysts and $3.128 trillion in May.
At the same time, economists note that the United States will not be able to respond efficiently because of the risk of causing irreparable damage to international trade chains.
Now the administration of Democrat president Joe Biden has to adapt to the economic policies of the Russian President Vladimir Putin and Chinese leader Xi Jinping. Massive quantitative easing since 2010 and sanctions against monetary assets of foreign states have lowered the confidence in the U.S. dollar and led the other great powers to build their own system. Russia and China have been working on that since 2014. Now India is joining them.
In addition, the yuan has set a new record for trading volume over the past months. More and more people are switching from dollars to the Chinese currency. According to an annual survey from UBS Asset Management, about 85% of central banks said they invest or are considering investing in the Chinese yuan. This is more than 81% in the previous year. Swiss bank UBS surveyed 30 of the world’s leading central banks.
When asked which reserve currencies are likely to benefit the most from a shift towards a multipolar world following recent events, 81% of surveyed central banks think that the Renminbi will benefit, and 46% the US dollar.
The Russian currency has also strengthened against the euro and the dollar amid sales of foreign exchange earnings by exporters since March 2022. In May the U.S. dollar fell below ₽ 64 for the first time since February 2020. The Russian ruble has also strengthened thanks to the growing gold reserves of the Bank of Russia and the announcement of Russian central bankers on March 25 that they would set a a fixed price of 5,000 rubles per gram of gold. Now one dollar is worth $57.29 Russian rubles and one euro is equivalent to € 58.30. Such levels were not seen since December 2014.
Gold prices will benefit from the current geopolitical and economic situation. War in Eastern Europe, geopolitical tensions in the Persian Gulf and in Eastern Asia will fuel the risks for the global economy. The out-of-control inflation in Europe and the U.S. also support the coming rise in gold prices. U.S. annual inflation hit record 9.1% in June, after record of 8.6% in May, 8.3% in April, 8.5% in March and 7.9% in February. Continuing to accelerate higher, U.S. inflation is out of control. We can expect a surge in prices of the yellow metal in 2023. The current drop in gold prices is temporary, as investors believe central banks will be able to keep rates rising and bank savings products will cover losses from high inflation. Their naivety will have a high price.
Read also : Gold, inflation and monetary policies
According to the 30 central banks surveyed in June 2022 by the UBS Asset Management team, “When it comes to gold, while 60% see its role in reserve management broadly unchanged, 40% see a rising role for gold going forward. When asked about the main factors that speak against an increasing role of gold in reserves, 61% mention its volatility, and 54% the cumbersome process of moving and storing it. 36% mentioned the illiquidity of gold and 14% had concerns about provenance and sustainability.“
The monetary policy of the Fed will further weaken the U.S. dollar, as the U.S. economy now can’t handle high rates without crash of the stock market and the real estate market. The Fed will have to lower against key interest rate in 2023, after some rate hikes in 2022. High inflation will destroy the purchasing power of the paper money printed by the Fed and the European Central Bank. The illusion of printed money will not last long in this context. Investors will run on gold in the coming months. In addition, the geopolitical plans of China, Russia and even India, lower the share of the U.S. dollar in the global economy. This dynamics started around 2010 and is now expanding further. A new global monetary system is emerging. Investors and assets managers will have to adapt.
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© Copyright 2022 – Swann Collins, investor, writer and consultant in international affairs.