China's decades-long strategy of suppressing the yuan to maintain export competitiveness has reached a critical juncture, with $2.5 trillion in off-balance sheet dollar holdings posing significant risks to global financial stability. According to analysts, the People's Bank of China (PBOC) and related entities have quietly accumulated this massive reserve through state-owned commercial banks, policy banks, and sovereign wealth funds—effectively hiding the scale of their currency manipulation efforts.
How China Manipulates the Yuan
Since joining the World Trade Organization in 2001, China has aggressively pursued policies to keep the yuan undervalued, making its exports cheaper and gaining an unfair trade advantage. Initially, this was achieved through direct purchases of dollar-denominated assets by the State Administration of Foreign Exchange (SAFE). However, mounting scrutiny from Washington forced Beijing to adopt more covert tactics starting in 2015. Today, the majority of China's dollar holdings—totaling $2.5 trillion—are concealed off SAFE's balance sheet.
"China, Inc. could hold more dollars off SAFE’s balance sheet than on SAFE’s balance sheet. Nice little trick," said Brad Setser, a Council on Foreign Relations senior fellow.
Implications for American Workers
China's currency manipulation has long undermined American industries, particularly manufacturing, by flooding global markets with artificially cheap goods. This practice has contributed to job losses and wage stagnation in the U.S., particularly in the Rust Belt. While the Trump administration designated China as a currency manipulator in 2019, subsequent administrations have hesitated to renew the label despite evidence that the case for designation is stronger than ever.
The ongoing suppression of the yuan not only distorts global trade but also poses systemic risks to financial markets. If China's off-balance sheet holdings are suddenly unwound, it could lead to significant volatility, destabilizing economies worldwide. For American policymakers, addressing this issue is critical to safeguarding domestic industries and ensuring economic sovereignty.