The US national debt is its Achilles heel, but China sees it as an opportunity

China is gradually establishing itself as a major player in what has recently been called the Global South, formerly known as the Non-Aligned Movement. In recent decades, China has become the largest creditor of developing countries. This has led many to fear that it will subjugate partners across the debt trap and use it to establish a hegemonic sphere of influence.

China's economic position is so strong that it is now considered the main threat to the US dollar. He is an influential member of the BRICS+ group (which also includes Brazil, Russia, India and South Africa). This group works to establish a multipolar world that challenges Western hegemony, particularly the leadership of the United States. I analyzed this question in a previous article.

Without using the term threat, the American administration now considers China as the the most serious long-term challenge to the international order. It is easy to understand why, since China's strategic objective is to end the supremacy of the US dollarthe keystone of American hegemony.

As a researcher in international political economy at Laval University, I study the role that China plays in the dedollarization of the world.

The stronghold of the American dollar

The supremacy of the US dollar underpins US hegemony in the current international order, as French economist Denis Durand explains in his article. International monetary war: the hegemony of the dollar contested? (International currency war: the hegemony of the dollar called into question?).

In addition to the fact that several currencies are linked to the dollar by a fixed link or fluctuation band, the American currency is also used in many third world and Eastern European countries, where it enjoys a level of public confidence much higher than local currencies. . [] The United States is the only power capable of contracting foreign debt in its own currency.

The hegemony of the US dollar over the global economy is reflected in its over-representation in foreign exchange reserves held by global central banks. The greenback remains superior to other currencies, even if there has been some erosion.

Despite a drop of 12 percentage points between 1999 and 2021The share of the US dollar in the official assets of global central banks remains relatively stable, around 58 to 59 percent.

The U.S. currency still enjoys widespread trust around the world, reinforcing its status as the predominant reserve currency. The U.S. dollar reserves of global central banks are invested in U.S. Treasury bonds in the U.S. capital market, helping to reduce the cost of financing public debt and private investment in the United States.

But the revenue generated by dollar hegemony for the US economy could also collapse like a house of cards. Durand underlines this when he writes that the monetary hegemony of the United States [] Cohesion is only ensured by the confidence of economic agents around the world in the American dollar.

Global confidence in the US dollar could decline for two reasons.

First, as US Treasury Secretary Janet Yellen admitted in an interview in April 2023, the United States unequivocally uses his dollar as a tool bend his enemies but also certain recalcitrant allies to his will. This could ultimately undermine the hegemony of the dollar.

On the other hand, the US debt situation, particularly its unsustainable nature, is a source of concern that could affect the attractiveness of the dollar as a global reserve currency.

An unsustainable debt

The American dollar has been at the heart of the international monetary system since 1944, and even more so since the Bretton Woods Agreement came into force in 1959.

The Bretton Woods system was based on both gold and the greenback, which was the only currency convertible into gold; this convertibility was fixed at rate of $35 per ounce.

This changed on August 15, 1971, when, due to inflation and growing imbalances in the international economic relations of the United States, Richard Nixon announced the end of the convertibility of the dollar into gold.

With the dollar pegged to gold, the United States' ability to borrow to meet government spending was limited. In the gold-based system, where gold was the backing of the U.S. currency, the United States could only borrow based on the amount of dollars in circulation and its gold reserves.

Abandoning the gold-based system gave the United States carte blanche on its debt. In 2023, the US public debt will reach more than $33.4 trillion, nine times the country's debt in 1990.

This astronomical figure continues to raise concerns about its long-term viability. As US Federal Reserve Chairman Jerome Powell has pointed out, US debt is growing faster than the economy. making it unsustainable in the long term.

An opportunity for China

This is a reality that China is clearly sensitive to, having recently undertaken a massive sale of the US debt it held. Between 2016 and 2023, China sold $600 billion worth of US bonds.

However, in August 2017 China was the largest creditor of the United Statesahead of Japan. It held more than $1.146 billion in U.S. Treasury bonds, nearly 20 percent of the amount held by all foreign governments. Beijing is now the second largest foreign holder of American debt, with a claim of approximately $816 billion.

It is certainly no coincidence that before divesting itself from US bonds, Beijing first launched its own system of pricing gold in yuan. Indeed, on April 19, 2016, the Shanghai Gold ExchangeChinese precious metals operator, revealed on its website its first daily fixed benchmark for gold at 256.92 yuan per gram.

This policy is part of China's strategy to make gold a tangible guarantee of its currency.

The Chinese Gold for Dollars strategy

China is also selling its US bonds. According to the US Treasury, between March 2023 and March 2024, China sold its assets $100 billion in US Treasury bondsin addition to the 300 billion dollars already ceded over the last decade.

At the same time, the Middle Kingdom has replaced about a quarter of the U.S. Treasuries sold in 10 years with gold, of which he is today the leading producer and consumer. Like the Chinese central bank, other central banks of emerging countries continue to buy gold.

China's appetite for gold was confirmed in 2010, when its gold reserves increased to 1,054 tonnes, from around 600 tonnes in 2005. Ten years later, in 2020, its gold stock had almost doubled again, to almost 2,000 tonnes. By the end of 2023, with a gold reserve of 2,235 tonnes, China will be the country with the sixth largest gold reserve.

As a replacement for the dollar, gold allows China to store the gains from its large trade surpluses. With the Shanghai Gold Exchange, which offers gold exchange contracts in yuan, Beijing seeks to strengthen the use of its currency abroad with the aim of imposing the yuan as the reference currency of the world economy. .