Future Shock: China's Remarkable $3 Trillion in Reserves; What Will China Do With Them?

China right now has its US reserves parked in US treasuries. The logical spot for some of those reserves is US corporations and US assets, returning the dollars where they mathematically must return.

This is to some -- unknown -- extent true. But not 100% true. China does not need to spend dollars directly in the US; its just that eventually, someone does. The question is what the dollar is worth when that happens. China could swap all of its dollars with Australia, Canada, and European interests (for companies, supply of commodities, etc.) if it was slick enough. True, then the Australians, Canadians, and Europeans would need to do something with those dollars. Eventually they would try to buy US-based assets. Clearly, with the dollar itself becoming such an unwanted commodity in that situation, they would be doing so at much higher dollar prices. It is possible that at the end of this game of "hot potato", conceivably one market participant could end up with all the dollars at which point they wouldn't even be worth enough to buy a meal in a US restaurant (hyperinflation)

No one knows how this will play out. Most likely, as soon as the world catches a whiff that China is making moves to unload most of its dollars, the rapid devaluation will begin. China knows this and is taking pains to avoid that appearance. The introduction of SDRs may drag things out a while, but ultimately this is going to be the dollar's fate.