In 1995, China’s application for WTO membership proved to be a challenging endeavor, as the process was far from straightforward. Because several European countries took a stand against China. There must have been a fair reason for it. The Chinese government continues to bombard these businesses with incentives rather than pursuing any legal action against them. Bill Clinton, who was president at the time, stood up for China and helped calm the enraged European nations. Clinton might have refrained from doing this, however, if he had known that China would attempt to surpass his nation as a super-giant in the world economy in 20 years.
In less than 70 years, China, which was once relatively impoverished and underdeveloped, has advanced to become one of the world’s major economic powers. Following a civil war with Nationalist forces, Communist leader Chairman Mao Zedong declared the People’s Republic of China to be established on October 1, 1949. Since then, the nation has witnessed major shifts during the past seven decades. Unprecedented wealth has been amassed quite rapidly. China has enacted several ground-breaking reforms to its socialistic market economy during the past 40 years, creating numerous possibilities for trade and investment. However, the interests of everyone else are not what the Chinese Communist government is concerned with. But in this age of globalization, we are aware of how interdependent nations are. The entire economy of a nation can suffer as a result of shortsighted policies.
It is unexpected to find out that China has been hoarding dollars in its reserve for the past 20 years. Making these purchases with its currency on the world market results in China depreciating the yuan. China is managing its expanding export and manufacturing sectors at the same time. As a result, trillions of dollars have accumulated in the country’s reserve. With them, the country mainly buys dollar-dominated debt and US Treasury bonds. Intriguingly, although China and the United States behave like daggers drawn in real life, they complement each other in the economic world. Data from the US Department of Treasury from January 2023 show that China is second followed by Japan in the $859.4 billion bond market. The United States imported $536.3 billion worth of goods and services from China alone in 2022, the biggest amount of imported goods and services from any one country, according to figures from the Office of the United States Trade Representative.
China’s economy saw a substantial shift from importer to major exporter between 1990 and 2000. In the past, China’s currency was artificially inflated to encourage imports. The Communist Party recognized the advantages of a devalued currency in the 1990s, and China now dominates the export market with its devalued currency, the yuan, which benefits the nation’s manufacturing industry. In 1995, one dollar was worth 8.3 yuan as opposed to 1.6 yuan in 1980. As a result, China accumulated a sizable trade surplus and had the capacity to produce goods at a lower cost than other nations. All things considered, there was a tremendous market for Chinese goods around the world, and exports far outpaced imports. It was anticipated that the additional demand for the yuan would rise concurrently with the increased demand for Chinese goods on the global market and that the value of the currency would follow suit. Additionally, it had been projected that China’s exports would expand in value and that the country’s purchasing power would rise, bringing the trade surplus into balance as a result of rising imports. China, however, wished to further develop its manufacturing and export industries. As a result, they continued to consistently devalue the yuan by purchasing dollars on the world market.
To house these additional resources, China has printed a lot of yuan. There was a possibility of inflation as a result of the Chinese economy. However, the People’s Bank of China exerted pressure on the country’s commercial banks to curtail lending to contain inflation. The funds were used by China to buy US-dominated financial assets. Thus, the two countries have fallen into the trap of a balance of financial terror.
For exports, China has long relied on the US. Also, the US requires China to convert its dollars into bonds. At the time, the United States was concerned that China would either dump its government bonds to raise interest rates in China or sell all of them to devalue the dollar. However, there was a possibility that China’s economy, which was dependent on American imports, would crash if it made such a drawn-out choice. However, the US recognized it didn’t require China to handle the deficit following the 2008 recession. The nation then printed the de facto dollar (by quantitative easing) to address the economic issue. Within the country, it did not show a significant rise in inflation. But China is now causing the United States trouble once more. Because the People’s Bank of China’s official reserve has dramatically expanded since 2010. Its actual size is inconceivable. China is also thought to be concealing another $3 trillion in its semi-official banks and agencies.
In contrast, demand for yuan to replace dollars in Chinese reserves will rise if the value of the dollar starts to decline and the Federal Reserve lowers interest rates. The world economy would be in peril if the money stored in Chinese banks and agencies were to be halted. Their dollar will lose value much more if they dump it. As a result, both devaluation and currency dumping will accelerate. The US and worldwide economies could undergo unthinkable changes as a result, which would be completely undesirable. China has, nevertheless, made some progress in comprehending the problem. Now, compared to before, they are stockpiling a lot more gold in their reserves. The nation continues to accumulate the safe-haven asset amid geopolitical and economic unrest. The central bank of China upgraded its gold holdings by 23 tons in June, the seventh straight rise. In the next five years, 62% of central banks anticipate that gold would account for a larger portion of reserves, according to a World Gold Council survey from May. Dollar reserves, which make up 40%–50% of total reserves, are expected to decrease at the same time.
To safeguard the world economy, China must adopt a more transparent and responsible approach to managing its foreign reserves. Rather than haphazardly stockpiling dollars and other assets, the Chinese government should engage in open dialogue and cooperation with other major economies, working towards a more balanced and sustainable global financial system. China appears to be hoarding dollars to safeguard its economic interests, but the global economy is actually at significant risk as a result. For the sake of all participating countries, a stable and flourishing global economy will depend on finding an appropriate balance between reserve diversification and cooperative economic policies. Our collective agenda should continue to be dominated by cooperative efforts to address the world’s fiscal crises and create a more robust and integrated financial landscape for future generations.
[Photo by Quince Media, via Pixabay]
The views and opinions expressed in this article are those of the author.
S.M. Sayem is a Dhaka-based foreign policy analyst who expertly combines sharp analysis with deep insights. With a trail of brilliance, his writings grace esteemed platforms like The Geopolitics, The Policy Digest, The Daily Observer, and Modern Diplomacy.
