I have been thinking about this recently. We saw with Russia what happens to a government's 'foreign reserves'. The ECB stole them all and is even discussing given them to Zelensky! China's $3trillion in foreign reserves could easily end up a $3trillion donation to their biggest enemies in Taiwan.
There is another way to weaken a currency - low interest rates.
With CBDCs replacing cash, china could easily roll out negative interest rates. Seize people's savings and what are they going to do about it? withdraw it into cash that was just replaced?
I heard that China's entire Domestic housing market was worth $70 trillion.
So even if they sell all their US bond holdings it wouldn't cover much of their housing debt. If their economy starts to see a massive shift away from property ownership the slide would be unstoppable.
Many of the smartest Chinese citizens are investing in overseas markets (where even as a foreigner they likely have MORE protection than if they buy an asset in china). To the Chinese citizen investing in Vancouver, they don't even care about a small decline in house prices - because if they keep the assets in china they are risking 100% of it being seized by the government.
You raise some interesting points, but I think they need some clarification. I don't think China's foreign reserves are likely to be seized, as they are mostly held in safe and liquid assets, such as US Treasury bonds. China does not need to sell its US bond holdings to cover its housing debt, as most of its debt is domestic and denominated in renminbi. So it's mostly citizens owing money to the government banks. China's housing market is not quite worth $70 trillion, but rather around $52 trillion - however that valuation is itself contentious. China's currency policy is not only determined by interest rates, but also by exchange rate interventions and capital controls. China has been gradually allowing more flexibility in its exchange rate and opening up its capital account, but it still faces challenges in balancing its external and internal objectives. While some Chinese citizens may definitely prefer to invest overseas, there are also many who are confident in China's economic prospects and legal system (I tried finding a % but it wasn't readily available). China has been slowly improving its property rights protection and financial regulation, as well as promoting domestic consumption and innovation. So I wouldn't assume that all Chinese investors are fleeing the country or risking their assets - remember we're talking about 1.3 Billion people - most of which do not have the liquidity or means to even be holidaying outside the country. But it is something that I think the CCP would be worried about and hence why they have made some small movements towards rectification. However if it will be enough remains to be seen. We live in interesting times. I'd honestly thought WW III would have broken out by now.
I don't think China's foreign reserves are likely to be seized, as they are mostly held in safe and liquid assets, such as US Treasury bonds.
I can't find anything definitive. But I expect that's exactly what the Russian foreign reserves were invested in. (Central banks are all pretty conservative and copy each other.)
I personally wouldn't like to predict how safe these assets would be if a war breaks out and the US congress starts passing legislation.
If I were China, I wouldn't take that risk for 1%(?) interest income that these legacy bonds are paying. Now would be a good time to take profits as US bonds have just rallied on mere expectations that rates will be cut in future.
I have been thinking about this recently. We saw with Russia what happens to a government's 'foreign reserves'. The ECB stole them all and is even discussing given them to Zelensky! China's $3trillion in foreign reserves could easily end up a $3trillion donation to their biggest enemies in Taiwan.
With CBDCs replacing cash, china could easily roll out negative interest rates. Seize people's savings and what are they going to do about it? withdraw it into cash that was just replaced?
I heard that China's entire Domestic housing market was worth $70 trillion.
So even if they sell all their US bond holdings it wouldn't cover much of their housing debt. If their economy starts to see a massive shift away from property ownership the slide would be unstoppable.
Many of the smartest Chinese citizens are investing in overseas markets (where even as a foreigner they likely have MORE protection than if they buy an asset in china). To the Chinese citizen investing in Vancouver, they don't even care about a small decline in house prices - because if they keep the assets in china they are risking 100% of it being seized by the government.
You raise some interesting points, but I think they need some clarification. I don't think China's foreign reserves are likely to be seized, as they are mostly held in safe and liquid assets, such as US Treasury bonds. China does not need to sell its US bond holdings to cover its housing debt, as most of its debt is domestic and denominated in renminbi. So it's mostly citizens owing money to the government banks. China's housing market is not quite worth $70 trillion, but rather around $52 trillion - however that valuation is itself contentious. China's currency policy is not only determined by interest rates, but also by exchange rate interventions and capital controls. China has been gradually allowing more flexibility in its exchange rate and opening up its capital account, but it still faces challenges in balancing its external and internal objectives. While some Chinese citizens may definitely prefer to invest overseas, there are also many who are confident in China's economic prospects and legal system (I tried finding a % but it wasn't readily available). China has been slowly improving its property rights protection and financial regulation, as well as promoting domestic consumption and innovation. So I wouldn't assume that all Chinese investors are fleeing the country or risking their assets - remember we're talking about 1.3 Billion people - most of which do not have the liquidity or means to even be holidaying outside the country. But it is something that I think the CCP would be worried about and hence why they have made some small movements towards rectification. However if it will be enough remains to be seen. We live in interesting times. I'd honestly thought WW III would have broken out by now.
I can't find anything definitive. But I expect that's exactly what the Russian foreign reserves were invested in. (Central banks are all pretty conservative and copy each other.)
https://www.reuters.com/world/europe/russian-central-bank-reserves-what-are-they-made-2022-02-28/
I personally wouldn't like to predict how safe these assets would be if a war breaks out and the US congress starts passing legislation.
If I were China, I wouldn't take that risk for 1%(?) interest income that these legacy bonds are paying. Now would be a good time to take profits as US bonds have just rallied on mere expectations that rates will be cut in future.