China’s dollar dilemma unresolved

S&P’s decision to put a negative outlook on the US’s AAA credit rating will have been greeted with wry smiles in Beijing. Officials there have long been of the view that US policymakers cannot be trusted to safeguard the value of China’s dollar investments. China is pressing ahead with attempts to reduce its reliance on dollars in international trade. Perversely though, because the renminbi is used far more often to pay for China’s imports than its exports, the People’s Bank ends up accumulating even more foreign reserves – mostly dollars – than it would do otherwise. This factor added roughly $40bn to Q1’s foreign exchange purchases.