EDIT: To clarify: "cash" refers to paper currency and coins; "dollar holdings" refers to dollar denominated assets.
No one is changing RMB to USD and just keeping that in China, you don't even get interest on that.
Meanwhile the Chinese economy runs on the RMB. Has the amount of RMB in circulation been dwindling? I doubt it. While the PBoC sold down forex holdings it also reduced reserve ratio and interest rates and directly intervened through money market operations to compensate.
Has the total forex holdings of all Chinese entities been going down? Likely but they swapped the holdings for other assets such as real estate. It has more implications for the other markets than for China, in that the asset preference is changing from central bank assets (forex reserves holdings of PBoC invested in government bonds) to assets preferred by private investors (real estate or other assets).
And who is selling USD to buy RMB these days (besides the export companies that have to)? Definitely not my Chinese colleagues, nor my foreign colleagues. The direction is basically one way at the moment. How long can that be sustained? Do you want to change some of your USD to buy a house in Shanghai?
> Meanwhile the Chinese economy runs on the RMB. Has the amount of RMB in circulation been dwindling?
I assume not, they are probably just printing a bit more ATM. And the vast majority of the Chinese people don't have dollar assets...its just the middle/upper class we are talking about. Their share of the economy is huge, however.
> Likely but they swapped the holdings for other assets such as real estate.
Yep. That real estate isn't in China, and isn't contributing to the Chinese economy.
Companies are still trading, earning USD, changing it to RMB. There are still trade surpluses. But it isn't enough to keep the surplus steady, the surplus will now shrink for awhile.