China holds $9 trillion in external assets and runs a $1 trillion annual trade surplus. Counterintuitively, this entrenches rather than undermines dollar dominance. There’s nowhere else for this capital to go except dollar-based assets.
The Surplus Trap
China may wish to diversify away from US securities – and has reduced Treasury holdings – but the sheer scale of its surplus means dollar assets remain the only viable destination. No other market is deep and liquid enough to absorb that flow.
The renminbi will become more widely used in China-ally transactions, but won’t fundamentally challenge the dollar because China’s trade surplus keeps recycling into dollar assets.
What Would China Need to Challenge the Dollar?
Shearing outlines the prerequisites – each would take decades:
Reduce the trade surplus: Increase domestic consumption, reduce savings
Build credible institutions: Stable, reliable financial and political institutions globally
Open the capital account: Investors must be able to get money in and out freely
Clean up the banking sector: Address bad debt from property sector overinvestment
Shearing’s Assessment
“I’m pretty skeptical it’s going to happen anytime soon.”
The structural requirements for RMB internationalization are a multi-decade agenda China has no clear plan to execute. And importantly: China is showing no intention of pushing to raise consumption as a share of GDP. The structural imbalance persists.
Key Takeaway
The dollar’s position isn’t just about US strength – it’s about the absence of alternatives at scale. As value chain analysis shows, structural advantages compound over time.
Source: The Great Fracturing with Neil Shearing on The Business Engineer
