De-dollarization: China drops US Treasury bonds, instead buys gold, oil, metals

De-dollarization: China drops US Treasury bonds, instead buys gold, oil, metals

the US dollar has been the dominant currency in the Global Financial System since the end of World War II however that system is changing more and more countries around the world are seeking alternatives to the US dollar in particular because Washington has weaponized its currency and used the dollar to serve its geopolitical interests the US and its allies in Europe froze $300 billion of ass assets belonging to Russia’s Central Bank and the US Congress has passed legislation that will allow the US government to seize that that is to steal that money from Russia and to use it to pay for Ukraine before that the US government also seized the foreign exchange reserves of the central banks of Venezuela Iran and Afghanistan today many other countries fear they could be the next Target of the US government and they have begun to diversify their reserves and also to dollarize their trade this includes two of the world’s largest economies China and Russia which are dollariz both their international trade and their reserves and Russia’s foreign minister Sergey lavro has reported that China and Russia have almost entirely dropped the dollar in their bilateral trade as of April of 2024 more than 90% of trade settlements between China and Russia are carried out using their own local currencies the Chinese Reni or Yuan and the Russian Ruble in 2023 China and Brazil also signed an important deal to dollarize their trade and instead use their own local currencies Brazil’s leftist president Lula Silva has been particularly outspoken on this topic calling for dollarization all around the world and he’s been very critical of the US government’s economic policies targeting poor countries developing countries in the global South and in particular he has condemned us-dominated financial institutions like the international monetary fund the IMF for trapping developing countries in unpayable debt what’s remarkable is it’s also longtime us allies which are trying to dollarize their trade as well in fact Saudi Arabia has said that it’s in discussions with China to price its oil sales to China in the in Chinese Yuan not in US Dollars when China’s president Xi Jinping visited Riyad in 2022 he signed a series of agreements with the gulf countries and also with the Arab League and at that meeting President XI announced that China is working on a plan in order for China to import oil and gas from the Persian Gulf region using Yuan not dollars in fact we’ve already seen a few of these transactions happen in 2023 China announced for the first time that it had bought gas from the United Arab Emirates and paid for that gas in Yuan so dollarization is very much happening this is not just a hypothetical process that could happen in the future it already is happening and it started slowly but it has been gradually picking up pace in the two decades from 2000 to 2020 the US dollar share of global foreign exchange reserves gradually declined from over 70% to just under 60% and in the past few years especially with Western sanctions on Russia and China and the war in Ukraine and growing geopolitical tensions this process of dollarization has significantly expanded and when we talk about dollarization I think it’s important to distinguish two different kinds sometimes people lump them together but they’re quite different I was speaking earlier about dollarization of international trade which in many ways is the easiest form of dollarization but another form of dollarization is dollarization of Foreign Exchange reserves of essentially the savings used by countries around the world held by central banks in order to stabilize their currencies central banks can strategically use these reserves in order to manage their exchange rates so if they think their currency is too overvalued against the dollar they can sell some of their currency and buy dollars or if they think their currency is too weak against the US dollar they want to strengthen their currency they can sell some of the dollars they hold in their foreign exchange reserves and buy their currency and foreign exchange markets and what we’ve seen in China is a significant dollarization of its foreign exchange reserves in the past decade in 2014 The People’s Bank of China that is China central bank saw its peak level of US Treasury Securities those are US government bonds that is debt it’s US Government IUS and since 2014 China’s Central Bank has been gradually dropping its Holdings of US Treasury Securities and as of 2024 they are now under 800 billion falling from a peak of about 1.3 trillion a decade ago now for the most part The People’s Bank of China has not been selling many of its US Treasury Securities instead it’s been letting them mature because they have a a certain matur maturity date you know usually 10 years is pretty common so after they mature China instead uses the dollars that it received from that bond in order to invest in gold in oil in metals in other assets China has been lending its dollars abroad and for the most part this has been a rather gradual process however there are some prominent voices in Beijing that are calling on the People’s Bank of China to dollarize even more quickly and this April the Western Financial press published reports highlighting comments that were made by a prominent Chinese intellectual who has influence in the political system the vice dean of renman University’s School of International Studies D dong Shang has been calling on China to drop its US Treasury Securities warning that the US can use them to hold China hostage and also warning that by holding this US Government debt China is actually helping reinforce Washington’s exorbitant privilege now I should point out for people who don’t know renman University is one of the top schools in China and it also is quite close to the government and the school of international studies at renman often has played an advisory role for the Chinese government and this article notes this is an article in the South China Morning Post it cites this scholar um Professor D who pointed out that the US government’s exorbitant privilege allows Washington to binge on debt and make gains at the expense of others I recently published a video in which I analyzed a study that was published by an economist who estimated that the exorbitant privilege of the US dollar the fact that the US government is the only country on Earth that can print the global Reserve currency that provides massive benefits to the US economy and if that exorbitant privilege were to end it would probably result in a fall in average daily income in the US of between 27% and as much as 57% I will link to that related video in the description below this influential Chinese scholar dong Shang argued that instead of relying so much on holding dollars in its foreign exchange reserves China can simply control its capital account that is maintain strong Capital controls in order to fend off external risks and short seller attacks so to prevent foreign speculators from trying to profit from attacking China’s currency China can use Capital controls and we do see that the People’s Bank of China is continuing to drop its Holdings of US Treasury Securities and Bloomberg reported this April that the People’s Bank of China bought gold for 17 months in a row and this is actually a significant reason why the global price of gold has significantly risen in the past few years of course it’s also because of fears of inflation many investors have been moving out of dollar assets and instead investing in gold but the People’s Bank of China is one of the world’s largest financial institutions this is a massive Institutional Investor with trillions in its foreign exchange reserves potentially at least in the past it had trillions so the fact that China is is now buying large sums of gold is a significant reason for the massive increase in the gold price a very mainstream Economist has been reporting on China’s dollarization of its foreign exchange reserves his name is Robin Brooks he is currently at the Brookings institution which is a very mainstream think tank in Washington that is funded by the US government and other Western governments and as he wrote China is trying to decouple financially from the US and he notes that in the past China invested a lot of its dollars in US treasuries now it’s building inventories in oil and base metal Imports this is financial decoupling and he has a useful chart and you can see that in the past few years especially with growing geopolitical tensions the war in Ukraine China has been investing a lot in buying more and more oil gold and other metals important Commodities that it needs to run its manufacturing sector and China of course is the world’s leading manufacturing producer responsible for about 35% of gross manufacturing output in the entire world Robin Brooks created another useful chart and it shows that China’s Imports of basic metals have increased by 60% since before the pandemic and he notes that China doesn’t want to put the dollars it earns into treasuries because that will only deepen its dependence on the US so China builds inventories in dollar denominated Commodities and again this is very important for China which is the world’s manufacturing superpower and it is the world’s leader in particular in green energy which is needed for the transition toward renewable energy technology so it’s not just gold that the People’s Bank of China is buying but also China is using a lot of the dollars it receives from its international trade and China has a very big current account Surplus so China has been using that in order to invest in oil and China is filling up its strategic petroleum Reserve in 2023 China had actually taken some of that oil out of its strategic petroleum Reserve in order to try to bring down the crude price and now China is filling that back up and another very important use of the dollars that China receives is simply going into providing loans financing for Global South countries this is part of China’s belt and Road initiative many developing countries have a chronic shortage of hard currencies that they need to pay for infrastructure development they need to pay for imports China has been providing that financing so this is a way that China can both dollarize and it can help to build infrastructure in important trading partners and China’s philosophy is if it helps Global South countries to develop these will be important trading partners for China in the future so it’s an idea of what China refers to as win-win cooperation or mutually beneficial collaboration China benefits from getting a trade partner and its trade Partners benefit by getting more robust infrastructure and spurring economic growth and poverty reduction what we’re seeing is really a historic shift because for many years now China has been one of the largest creditors to the United States which means that Beijing was essentially helping Washington to maintain its massive current account deficit its trade deficit with the entire world and allowing the us to continue to run massive deficits and import significantly more than it produces the political Economist Giovanni origi explained this quite clearly back in 2007 in his book Adam Smith in Beijing he pointed out that after the droing of the com bubble in the US around 2000 he noted that Japan and China were the most important creditors for the US government and he pointed out that in 1997 on his way back from a G8 meeting in Denver that featured considerable chest thumping by the Clinton Administration about the booming US economy Japan’s prime minister told a New York audience that Japan had been tempted to sell large Lots of US treasuries during Japan’s negotiations with the us over Auto Sales and again when exchange rates were fluctuating wildly while the United States appeared preoccupied only with domestic issues as one commentator noted Hashimoto was simply reminding Washington that while it had created a robust economy Asian central banks held the deed and in the same book arigi also pointed out that the current accounts of the countries of the global North taken together have experienced an escalating deficit for the most part due to the massive us deficit which corresponds simultaneously to an escalating Surplus in the current account of the rest of the world in particular the former third and second worlds that is the global South and the former socialist Block in Eastern Europe and ariki pointed out that the growing dependence of Northern and especially us Global Financial domination was on a flow of money and credit from the very countries that are most likely to become the victims of that domination joavan origi wrote that back in 2007 but it’s exactly what we’re seeing today nearly two decades later China was the most important creditor to the US government and now it is dollariz China had previously been the largest for holder of US Treasury Securities China has been dropping those Holdings and now Japan is the largest this is the official data from the US treasury’s website and you can see that China’s Holdings have been declining just in the past year they’ve Fallen by about 100 billion from 869 billion to 775 billion meanwhile Japan has actually been increasing its Holdings of US Treasury Securities which as of February of 2024 are now at $1.17 trillion and this also comes at a time for the US economy which is quite difficult because the US government has been dealing with large rates of inflation so the Federal Reserve the US Central Bank significantly raised interest rates and it has been engaged in quantitative tightening that is it has been slowly trimming the assets on its balance sheet and this comes after of course over a decade of quantitative easing in which the Federal Reserve printed trillions of dollars in order to buy many different assets including not only mortgage back Securities but also treasury Securities the Federal Reserve became one of the world’s largest investors in US Government debt and now the FED is slowly allowing that debt to mature dropping its Holdings of US Treasury Securities and this combined with Rising us interest rates have resulted in very high year bus on us bonds which have neared 5% these are very high rates after over a decade of very low rates and this is becoming very difficult for the US government which wants to reduce the yields on these bonds because the higher the yields are the more expensive it is for the US government to run massive deficits like the US government is is still running deficits of over 6% of GDP and the US government’s federal debt is now at 122% of GDP which means that the higher yields are the more that debt grows and furthermore this has led to a contradiction because the US is trying to bring down inflation so the Central Bank raised interest rates however the debt is so high that as the debt increases the interest payments that the US government has to pay to Holders of bonds those interest payments are so high that they are also fueling inflation so the US is getting to a point where it’s difficult to manage both inflation and its debt at the same time and then add the fact that China is no longer purchasing US Treasury Securities that’s the loss of a massive investor in the market which results in decreased demand for treasury Securities and therefore higher yields so the US is starting to see serous consequences for its fiscal and monetary situation and this is precisely because of the gradual erosion of the exorbitant privilege of the US dollar it’s not going to disappear overnight it’s going to be this kind of slow gradual process that we see happening but it is happening and there are some mainstream economists who deny this some of the pundits in the western media deny this but of course my viewers and listeners probably understand that they they should not take those people seriously they have drunk the Kool-Aid of the US government and they believe that the US dollar and the US Empire based on the dominance of the US dollar is Invincible but as we’ve seen with the very rapidly shifting geopolitical situation in the world it is anything but Invincible on that note I’m going to conclude I’m Ben Norton I am the editorinchief of geopolitical economy report please like And subscribe please share and I will be back very soon I’ll see you all next time thanks a lot

China is reducing its holdings of US Treasury securities. Instead, the People’s Bank of China is buying gold, and Beijing prioritizes imports of important commodities like oil and metals. Ben Norton discusses the geopolitical impact of de-dollarization in the world’s largest economy.

Check out our related video – “How the dollar’s ‘exorbitant privilege’ enriches the USA (and global elites)”: https://youtube.com/watch?v=jYkiMcR1Rj8

Topics
0:00 Why countries are de-dollarizing
1:05 Russia & China
1:41 Brazil & China
2:18 Persian Gulf oil & gas
3:29 Central bank FX reserves
4:54 China drops US Treasurys
6:15 Debate in Beijing
8:40 Gold
9:37 Charts: China buys metals & oil
11:21 Strategic petroleum reserve
11:53 Belt & Road Initiative
12:50 East Asia funds US deficits
14:25 Global South funds Global North
15:25 Japan replaces China as top US creditor
16:03 US inflation, interest rates, bond yields, & debt
18:48 Outro

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