China is recognized as having as much as $1.2 trillion in dollars, perhaps 70% of their entire reserve. If the Chinese decide to unload, the dollar would drop markedly. This “nuclear option” of openly divesting greenbacks has been unanimously disregarded as mere posturing. It’s claimed that the subsequent dollar devaluation would be too harmful to Chinese reserves.
What is missing from that analysis is the fact that reserves are “extra”. Suppose China moved to divest itself of dollars and the dollar deflates to the value of a quarter. How bad is that for China really? So what if their cash reserve shrinks in value to only $300 billion? China can afford the loss. It was surplus money anyway, and probably, to the Chinese, the political gain would be worth the loss. In comparison the U.S. doesn’t have any cash reserves.
Compare the situation to those bankers who receive million dollar bonuses and the average working Joe. If a dollar deflates to a quarter, the banker’s bonus is now worth only $250,000 while Joe’s entire net worth is decimated. Joe becomes homeless while the banker just has to put off buying his Bugatti Veyron for a while.
China has been quietly buying up vast amounts of resource assets such as mining and energy companies. This seems to telegraph a future willingness to abandon the dollar. When China moves, it’s ruthless. Just ask a Tibetan. Now, I’m no economic or political wizard, so please tell me where I’m wrong…