In my view, the commentary was intended to voice the opinion of Chinese leaders that they are fed up with the political fighting in Washington, leaving China’s trillions of dollars in U.S. debt in the hands of ineffective leaders.
With the U.S. dollar as the reserve currency, there is very little recourse for many nations around the world. You have to remember that for countries to make large trades on an international scale, a reserve currency is required for transactions. Increasingly, China is looking to move away from the U.S. dollar as reserve currency to lessen its reliance on our nation. This is part of the reason why China’s leaders are looking to move away from an export-led economy and toward a more domestic-oriented economy.
However, much of the commentary was geared towards politics, rather than purely economics; one example: the U.S. is “meddling in the business of other countries,” a not-too-subtle hint that we should stay out of China’s affairs.
They are right in one aspect: we have abused our power as the reserve currency and have run up a massive amount of U.S. debt. At some point, countries around the world that depend on the U.S. dollar as the reserve currency as well as trillions of dollars in invested U.S. debt, will get fed up and look to alternatives.
In one sense, we are lucky that the rest of the world is in such a mess. If you were China and you had trillions of dollars in excess foreign reserves (mainly U.S. dollars) that you need to invest, what are the alternatives? Japan’s debt? There’s no return, and it’s too risky. What about Europe’s debt? Possibly, but it’s still riskier than U.S. debt.
Part of the reason why China has been aggressively buying gold as well as physical properties and businesses around the world is that this helps the country diversify its foreign reserves. As the level of U.S. debt continues to grow and political grandstanding makes America look like a laughingstock to the rest of the world, this further raises doubts as to the rationality of having the U.S. dollar as reserve currency forever.
