May 20, 2022
Chinese Yuan and US Dollar

China is in the process of diversifying its reserves to reduce its dependence on the US Dollar, analysts say.

ANZ Research has released a report that says ongoing trade tensions between China and the U.S. has “increased the risk of a financial decoupling” between the two economies, and predicts that Beijing will manage risk by diversifying its foreign exchange reserves.

China has already been reducing its holdings of U.S. Treasurys, and was surpassed by Japan as the largest foreign holder in June. The country is believed to currently hold around 59% of its foreign exchange reserves in US Dollars but this number is also decreasing, a trend that ANZ warned is likely to continue as long as tensions simmer between the two nations.

“Although China still allocates a high share of its FX exchange reserves to the USD, the pace of diversification into other currencies will likely quicken going forward” says the report.

The exact allocation of China’s foreign exchange reserves is unknown, but includes the British pound, Japanese yen and euro.

One other way China is expected to manage risk is by diversifying into other forms of assets, something ANZ believes is already happening.

“We believe that the Chinese government has already discreetly diversified its offshore portfolios to include alternative investments” the report added.

Beijing has also been going on a gold buying spree lately, with reserves sitting at record levels of 1,957.5 tons in October.