China’s ‘nuclear’ option in its financial war with the United States has long been assumed to be rapidly liquidating its outsized Treasury bond holdings, as this could crash the dollar, jack up interest rates and disrupt the U.S. economy.
Concerns about this potential threat have returned in recent weeks, as all-out trade war has broken out between the world’s two largest economies. But this fear of ‘mutually assured financial destruction’ is, and has always been, a notion based more in myth than reality.
Dollar-denominated assets made up 55% of China’s official currency reserves at the end of 2019, the last official confirmation of this figure by China’s State Administration of Foreign Exchange (SAFE), down significantly from the peak of 79% in 2005. It was also below the prevailing global average in 2019 of 61%, according to International Monetary Fund data.
Some of this has likely been offset by increased dollar holdings among…
