BUSINESS Diversifying reserves is first step in decoupling

BUSINESS

Diversifying reserves is first step in decoupling

Global Times

09:32, July 30, 2019

China's massive foreign exchange reserves have drawn attention as the country for the first time disclosed its rate of return on investment, which suggested a further diversification of its reserve holdings.

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File photo: VCG

The State Administration of Foreign Exchange (SAFE) said in a report published Sunday on its website that non-US dollar assets accounted for 42 percent of China's total reserves at the end of 2014, higher than the global average of 35 percent. 

The share of the assets in the US currency declined from 79 percent in 1995 to 58 percent in 2014. 

Although the SAFE did not provide more recent data, it is believed that the figure has continued its downward spiral in the following years.

A lower figure means China's reserve holdings bear less risk as the prices of US dollar-denominated assets fluctuate. In other words, the US will have less influence on these assets. 

The diversification of the reserves reflects China's efforts to develop greater economic endurance against possible US attacks.

The ongoing trade war with the US is prompting China to make strategic adjustments for a possible decoupling of its economy from the US. 

In an increasingly interconnected world in which both China and the US are important players in global supply chains, it is impossible to cut economic links between the two countries, but China is trying to reduce its strategic dependence on the US economy. The key issue on the agenda is to reduce the US presence in the strategic sectors of the Chinese economy and weaken the irreplaceable role of the US in certain supply chains. 

Decoupling will no doubt deeply affect the global economy in a wide range of sectors such as agriculture and integrated circuits. Chinese telecom giant Huawei has been creating "spare tires" that would allow the company to survive if the US cuts off its supply of key components and parts. 

Such concepts should be adopted in other industries to reduce China's dependence on US capital, technology, products and talent. 

Decoupling is likely to involve lots of countries in the upstream and downstream segments of different industrial chains and countless companies.

It will not be easy and it will also be a lose-lose situation for China and the US to decouple their economies from each other. But China must be prepared for a worst-case scenario where the US uses all possible means to contain China including cutting off links to China's strategic sectors. 

The diversification of China's reserve holdings is a milestone in the process. It is still too early to predict an outcome, but the trade war highlights the urgency of accelerating the process.

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