In the second quarter of 2020, all countries sold US bonds worth $ 500 billion, highlights Michael Howell, head of the company CrossBorder Capital in his article for the Financial Times newspaper. And China got rid of a third of all these financial instruments.

Since joining the World Trade Organization, the Asian giant has supported the demand for dollars in the world, thus reducing the cost of loans to the United States. As China continues to abandon US-denominated financial instruments, its demand will continue to fall, making it increasingly difficult and costly for Washington to finance its budget deficit.

Some Chinese officials are now talking about the need to get rid of dependence on the dollar as soon as possible and to promote the internationalization of the yuan. America’s rather aggressive last steps were the reason for its concern.

In particular, the US Senate approved sanctions for alleged harassment of Uighurs in the Xinjiang Uighur Autonomous Region and China’s adoption of the Hong Kong National Security Law. For these restrictions to take effect, they must still be approved by President Donald Trump. However, to date, Trump has been slow to take further action against China because he feared that trade negotiations between the two countries would collapse.

In the wake of the pandemic, the US economy plummeted, and US politicians appear determined to play the card of the alleged Chinese threat. The sanctions against the financial institutions of the Asian country can be really painful for Beijing. In 2019 the yuan claimed just over 19% of China’s international payments. Today the dollar and the euro continue to be used to do most of the trade, recalled Sputnik Chen Fengying, an expert at the Institute of World Economics at the Chinese Academy of Contemporary International Relations.

“The even bigger problem is that of China’s foreign exchange reserves. It takes more time and some effort for Beijing to get rid of the dollar. We can see that every country in the world facing dollar hegemony is trying to end this dependency, but there is still no alternative. The same can be said about the euro,” he warned but added that in the long term, de-dollarization in China should become a goal and not just a wish.

In the short term, sanctions against China may also harm the United States. According to the WTO, China generates 13% of exports and 11% of world imports. Failure to use the dollar in its international payments could cause turmoil in the United States’ financial system.

Furthermore, Russia’s experience shows that should access to the US financial system be restricted, it is relatively easy to move to euro-denominated agreements. As a result, the US is simply trying to reduce the participation of its currency in international agreements. 

A few years ago the dollar was used to make more than half of international agreements, and now it is the currency of payments for only about 40% of trade agreements. The status of the dollar as the main currency in the world allowed the United States to have a huge budget deficit for many decades since it was financed by other countries. Thus, the threat of a financial war with China is likely to go beyond rhetoric, said expert Chen Fengying.

For now, the global investment environment leaves much to be desired. In many regions, deposits have become negative rates. However, US bonds are still in a positive zone. Therefore, Chen explains, it is impossible to stop investing in US debt. However, due to the impact of quantitative easing and the huge budget deficit, Treasury bonds cannot be considered as a very reliable instrument. 

“You could say that all the apples are already rotten. But among all of them, the dollar is still quite reliable. If other currencies had inspired as much confidence as the US, we would already be paying with them. But, unfortunately, there is still no an alternative. This is a real problem of the world economy,” he concluded.