Indeed, assume it was cash. That is, assume that the Chinese sold yuan/renminbi for US dollars and then withdrew Federal Reserve notes that it shipped back to hold in vaults in Beijing.

That withdrawal of Reserve notes would drain reserves from the system, and if the Fed is maintaining a target cash rate, it has to buy Treasury bonds to re-inject the reserves back into the system to maintain the rate. The same amount of bonds that the Chinese would be buying and holding if they were holding the FXR in bonds.

That means that the big change was not in the 1990's, but in the middle of the current decade, when the Chinese went from a US$ peg to a hidden basket peg, putting a composite foreign exchange rate, that they don't declare, on a basket of foreign currency, including US$, where they don't declare the make-up of the basket.

Of course, it is necessary to distinguish between what the Chinese monetary authority it doing and what the balance of the Chinese finance sector is doing. In the past year, stories in the finance press suggest that Chinese commercial banks have been whittling down their holdings of US$ denominated assets.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.