context: The PRC has accumulated substantial holdings of US Treasuries and relies heavily on the dollar for trade and investment. This once offered stability, but rising US debt, geopolitical uncertainty and policy shifts have made it a growing risk. Looking ahead, Beijing will likely treat greater financial independence as part of its broader strategy. Apart from managing risk, this approach is also rooted in the philosophy of focusing on the PRC’s own long-term growth priorities–strengthening its position in the global system, as well as maintaining stability and predictability.
The second Trump term could heighten risk in US Treasuries and the US dollar, shocking the international monetary system, warns Zhang Ming 张明 Chinese Academy of Social Sciences Institute of Finance deputy director
- three structural challenges
- generalised Triffin dilemma
- US must keep running external deficits to drip‑feed dollars, yet soaring net debt erodes trust
- US Fed (Federal Reserve) spillovers
- policy designed for domestic goals jolts emerging market currencies and assets on each rate cycle
- dollar weaponisation
- freezing reserves and kicking banks from SWIFT
- finance becomes a sanctions tool
- generalised Triffin dilemma
- Trump 2.0 turns fissures into fault lines
- deeper tax cuts plus higher tariffs widen the fiscal gap while squeezing the 'trade deficit+dollar pipeline'
- Trump's pressure on the US Fed risks crushing its independence and raises fears of US deficit monetisation
- 2024 Milan Report ideas (forced FX revaluation, ultra‑long zero‑coupon swaps) would hinder treasuries’ status as the world’s safest asset
- net effect
- treasury yields jump, dollar credibility wobbles, international monetary system faces a shock
Zhang recommends Beijing should
- steadfastly advance the new ‘dual-circulation’ development paradigm
- strengthen the domestic economic cycle by building a unified national market, lowering the dependence of PRC economic growth on exports
- accelerate the diversification of foreign-exchange reserves
- gradually trim holdings of US Treasuries
- raise allocations to euros, emerging-market assets and commodity-linked assets
- promote prudent and steady RMB internationalisation
- continue to issue RMB-denominated government bonds on-shore and off-shore, filling the safe‑asset gap left by the waning credibility of US treasuries
- speed up CIPS (cross-border interbank payment system) construction and expand mBridge
- upgrade the cross-border interbank payment system and scale up the mBridge platform
- improve traditional and digital cross-border payment rails to cushion any future blow from possible US financial sanctions