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George Magnus is an associate at Oxford University’s China Centre, research associate at SOAS, and author of Red Flags: Why Xi’s China is in Jeopardy.

De-dollarisation is a frightful word that is chronically over-used to describe things that really aren’t happening much. Yet it is all the rage as people again seek simple narratives in volatile and highly geopolitical times.

FT Alphaville set out one of the more reasoned expositions here but even that, by seasoned foreign currency analyst Stephen Jen, failed to convince. Here is why.

We can all agree that some central banks have in the past moved significant proportions of their reserves away from US dollars — for example China 2005-2015, and Russia more recently has been frozen out of dollars and euros. But there hasn’t been any substantial evidence to demonstrate that the dollar’s reserve status as such is under threat.

There is no question that the weaponisation of the dollar as part of the creation of an infrastructure of restraint aimed at Russia and China has made these two autocracies and some countries jumpy, and keen to try and sanction-proof themselves financially — if indeed this is possible. Yet, the suggestion that the decline in the dollar component of global reserves fell significantly faster — by an additional eight percentage points according to Jen — in 2022, vindicating the notion of a global shift away from the dollar as the primary reserve asset is far-fetched.

If you want to get into the entrails of this reserves statistics salad, you should read Brad Setser at the Council For Foreign Relations. He demonstrates that the fall in reserves, reported by the IMF and used by Jen, is principally due to valuation changes in central banks’ bond portfolios as the Fed’s monetary regime shift gathered momentum. Further, it is quite common to see central banks do a bit of asset allocation away from dollars in the wake of periodic surges, such as that from 2020 to September 2022.

Moreover, data from neither the US balance of payments accounts on official reserve assets nor from the Treasury International Capital (TIC) system, which records portfolio capital flows in and out of the US indicate that anything was unusual in the last year. Flows into US Treasuries, agencies and other debt instruments continued to rise.

It is reported that the BoJ sold over $50bn in its attempt to halt and reverse the fall in the yen last summer. There was no change, as far as we know, in China’s holdings of dollar reserves, nor of any major central banks that would have made a difference to the aggregate data.

Importantly too, in modern times you can’t look at central bank asset movements alone. The activities of sovereign wealth funds and state banks (notably in China, but elsewhere too) are also key. The former typically hold fewer portfolio assets and fewer dollars, but are no slouches in US debt markets, while the latter are often used as proxy agents for central banks to hide dollar reserve acquisitions. Incorporating these institutions is possible using wider data sets than just the IMF, and again do not reveal de-dollarisation in the way its proponents assert.

To return to sanction-proofing and the China and Russia pied-pipers leading the world towards a monetary system in which the dollar is an also-ran, the reality is not quite like it is painted, often self-servingly.

Again, we can all acknowledge that there is a shift towards paying invoices in other currencies, and trying to set up alternative payments and clearing systems that bypass SWIFT and the TIC system. The yuan’s share in Russia’s import and export settlements during 2022 jumped to 23 percent and 16 percent, respectively, from, 4 percent and 0.5 percent. China has created emergency yuan swap lines with some other central banks in a bid also to encourage more local currency trade financing that bypasses the US dollar. It is developing its own international payments infrastructure has also encouraged Saudi Arabia, other oil states and Brazil to finance more trade in yuan. Most of these amount to pretty small beer.

Use of Chinese currency to settle more bills, though, does not advance the cause of the yuan as a reserve currency, let alone an alternative to the US dollar. Recipients of yuan are still left with the issue of either keeping a currency asset that is still barely used globally, or selling it for readily tradable currencies with open and transparent financial architectures. That’s to say nothing of trust and other properties that full internationalised currencies must have.

While the IMF has shown that reserve diversification in Australian and Canadian dollars and even the Swedish krona and Korean won has been remarkable, these currencies should be considered as parts of the dollar-based monetary system’s orbit. There really isn’t an alternative as things stand, and the idea that the yuan might become a truly internationalised currency is a narrative that lacks credibility.

It could only happen if China allowed the rest of the world to accumulate large claims in yuan, meaning either sustained large external deficits, or free outward movement of capital. Neither is desired by this mercantilist state, which also fears capital flight and threats to its own $60tn domestic banking system. Xi’s China is, therefore, stuck between the devil of balance of payments surpluses and the deep blue sea of a closed capital account.

If de-dollarisation is really going to happen some time in the future, the US will be the agent. But it really isn’t happening now, even if usage of other currencies for settling bills and denominating swaps is becoming more popular and acceptable.

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