CrossBorder Capital: China’s support for US dollar can no longer be relied upon

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.

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.

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