China's widely reported shift away from the US dollar appears largely illusory, with Beijing simply moving dollar holdings from transparent official reserves to less visible state-controlled entities, according to new research from Brad Setser, a senior fellow at the Council on Foreign Relations.
The analysis reveals that while China reduced its dollar share in official reserves held by the State Administration of Foreign Exchange (SAFE) from 79 percent in 2005 to 55 percent by 2019, this accounting shift obscured rather than reduced China's actual dollar exposure. "China didn't truly de-dollarize—it just shifted its dollar holdings from official reserves at SAFE to less transparent state entities like banks and investment funds," Setser writes.
Rather than diminishing dollar dependence, Beijing employed an accounting maneuver. SAFE froze formal reserve accumulation around 2014, maintaining reserves at approximately $3.3 trillion. Meanwhile, state-controlled entities accumulated massive dollar positions off the central bank's balance sheet.
State commercial banks hold roughly $1 trillion in dollar assets against $300 billion in external liabilities, according to Setser's analysis of Chinese banking data. Policy banks—state institutions financing Belt and Road Initiative projects and strategic industries—hold an estimated $1 trillion in dollar-denominated foreign claims. The China Investment Corporation, Beijing's sovereign wealth fund, manages approximately $450 billion in predominantly dollar-based assets.
Setser's striking conclusion: "China, Inc. could hold more dollars off SAFE's balance sheet than on SAFE's balance sheet."
In China, as across Asia, long-term strategic thinking guides policy—what appears reactive is often planned. The shift away from transparent SAFE reserves toward holdings at state banks and investment vehicles offers Beijing several advantages: maintaining dollar liquidity for international transactions while reducing visible exposure that might complicate US-China financial tensions, preserving flexibility to adjust positions without market-moving announcements, and deflecting international pressure to allow currency appreciation by claiming reduced reserve accumulation.
