Beijing Sounds Alarm About Dollar’s Reserve Status

As excerpted from Bloomberg macro commentator Ye Xie

Beijing Sounds Alarm About Demise of Mighty Dollar

With all the money printing and borrowing, is this the beginning of a long decline for the dollar?

Clearly this is on the minds of some senior Chinese officials. Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, delivered a strong warning on the U.S. currency this week.

He made four points in a speech at the Lujiazhui Forum in Shanghai:

• A. The Fed is the de facto central bank of the world. When its policy targets its own economy without considering the spillover effect, the Fed is “very likely to overdraft the credit of the dollar and the U.S.”
• B. The pandemic may persist for a long period of time, and countries keep throwing money at the problem with a diminished impact. “It is recommended that you think twice and reserve some policy space for the future.”
• C. There is no free lunch. Watch out for inflation.
• D. Financial markets are disconnected from the real economy, and such distortions are “unprecedented.” It’s going to be “really painful,” when the policy withdrawal starts.

“Some people say: ‘Domestic debt is not debt, but external debt is debt. For the United States, even external debt is not debt. This seems to have been the case for quite some time in the past, but can it really last for a long time in the future?”

What will China do?

“China cherishes the conventional monetary and fiscal policies very much. We will not engage in flooding the system, nor will we engage in deficit monetization and negative interest rates.”

It’s not the first time China vented frustration against the “exorbitant privilege” of the dollar. After the financial crisis, then-PBOC Governor Zhou Xiaochuan proposed using the SDR to replace the dollar as the main reserve currency.

It went nowhere. But this time, China seems to be determined to enhance its reserve-currency status by avoiding unconventional policies. It won’t dislodge the dollar tomorrow, but its attractiveness is clear in the foreign flows to its bond market.