China has visibly reduced the dollar share in its official reserves, dropping from 79% in 2005 to 55% in 2019. However, this figure tells only part of the story.
In fact, explains Brad W. Setser in a new paper from the Council on Foreign Relations, Beijing never truly abandoned the dollar, but simply moved it off the SAFE balance sheet through other state-controlled vehicles, such as policy banks, commercial banks, and investment funds.
The result is that all of China probably holds more dollars outside official reserves than within them.
The evolution of official reserves and the decline in the dollar share
The most significant drop in the dollar share of official reserves occurred between 2005 and 2012, when it fell from 79% to about 55-59%.
During that period, however, China’s total reserves were exploding, rising from $800 billion to over $3 trillion. Consequently, despite the percentage decreasing, the absolute volume of dollars continued to grow.
After the 2014 peak, reserves stabilized around $3.0-3.3 trillion and remained virtually flat for nearly a decade. Subsequent changes in currency composition were limited and did not produce significant impacts on global financial flows.
U.S. Treasury data confirm that there has been no significant rise in the dollar share in recent years.
The accounting game
The true distinctive element of China’s strategy, the author emphasizes, is that Beijing capped the growth of official reserves while continuing to accumulate foreign financial assets through alternative channels.
All the increase in the country’s foreign assets occurred through loans from policy banks, internally financed, through the expansion of foreign assets of state commercial banks, and thanks to investments by various state-controlled funds, including SAFE’s Buttonwood Investments vehicle, used to support the Belt and Road and the internationalization of Chinese enterprises.
In essence, China reduced the dollar share on the visible balance sheet of the central bank but continued accumulating dollars through less transparent entities.
Lack of transparency
The lack of detailed public information represents one of the main problems.
There are no reliable data on the currency composition of foreign assets held by policy banks, although cases of debt restructuring in Zambia, Sri Lanka, Ecuador, and Angola show that the vast majority of exposure was in dollars.
Recent conversions of some loans to Kenya into yuan remain marginal and do not change the overall picture.
Data on state commercial banks are also fragmented and not always consistent between SAFE and the People’s Bank of China.
What clearly emerges is that about 70% of these banks’ foreign currency assets are denominated in dollars.
Even more significant is the differentiated behavior by currency: positions in euros, yen, and other non-dollar currencies are generally hedged by liabilities in the same currency, while the net dollar position is strongly positive and continues to grow. Dollar assets increase while dollar liabilities decrease.
Intervention through the banking system
A significant portion of foreign assets of state banks appears to be internally financed through foreign currency deposits from customers.
This mechanism has allowed China to accumulate a net dollar position exceeding $700 billion at the end of 2024 and which is rapidly increasing.
The anomalous behavior of foreign currency deposits – which grew between 2019 and 2021 despite Chinese rates being higher than U.S. rates and then fell in 2022-2023 despite the opposite actions of the two central banks – reinforces the idea that these flows are influenced more by currency policy operations than by spontaneous savers’ choices.
Aggregate estimates and the dollar balance sheet
Aggregate estimates provide a telling picture. Official reserves contain about $1.8 trillion in dollars. Added to this are over $1.0-1.1 trillion in dollar assets held by state commercial banks, nearly $1.0 trillion estimated in policy banks, and the vast majority of the $450 billion in foreign assets of the China Investment Corporation, as well as other controlled funds. Summing it all up, dollar assets held outside the SAFE balance sheet likely exceed official holdings.
This is, Setser concludes, a “clever” accounting operation that created the impression of a decisive de-dollarization, while the reality appears much more nuanced.
China has not abandoned the dollar; it has only made it less visible.
