Social Sciences in China (Chinese Edition)

No. 5, 2024

Reduced Holdings of US Treasury Bonds and the Path to Diversification of the International Monetary System

(Abstract)

Liu Dongmin and Song Shuang

The dollar-centric international monetary system is inherently unstable as a hegemonic system, while the formation of a multi-polar international monetary system remains elusive. Through the critique of hegemonic stability theory, balance of power theory and international monetary power theory, combined with qualitative and quantitative analyses of international financial theory, research conducted from the perspective of the interaction between the pressure of the US government’s debt and the international credit of the US dollar reveals the existence of a peaceful and gradual market evolution path for international monetary system reform. Under market conditions, the US government’s escalating public debt has become one of the key factors leading to the decline of the dollar’s international credit. This decline, coupled with the sustained rise of other international currencies, will push foreign official institutions to reduce their holdings of US treasury bonds and lower dollar reserves. Consequently, this will trigger an increase in America’s medium-and long-term interest rates on treasury bonds and exacerbate fiscal pressures.  Ultimately, this sets in motion a self-reinforcing cycle that transitions the international monetary system from hegemony towards diversity. Scenario simulations illustrate the potential impact of reduced US treasury bonds holdings on the US fiscal landscape under market conditions, as well as the dynamic trajectory it would set in motion towards the diversification of the international monetary system.