When things cannot go on forever, they stop. And so it is with China’s support of the US dollar. Foreigners sold more than $500bn of US government bonds during the second quarter, and perhaps one-third of that was unloaded by Chinese entities. The trend is worth watching.
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If China is going to maximise its potential over the long run, it needs to get off the dollar hook and become a major exporter of its own currency. But the country’s key problem is that its domestic financial markets are too under-developed to intermediate cross-border capital flows. Foreigners still have limited access to China’s bonds; there is no sizeable renminbi-based trade credit market for the nation’s banks; and the currency itself is not widely traded outside China.
The full article is available at https://www.ft.com/content/8e7379c5-9324-4d31-9fcb-fd1e7bc621b0