The following is an excerpt from Christopher Vassallo's op-ed in War on the Rocks. Christopher is an Affiliated Researcher on Chinese Economy at the Asia Society Policy Institute's Center for China Analysis.

In the ongoing U.S.-Chinese financial war, Beijing has focused on insulating China’s strategic trade from dollar-based financial sanctions. This objective has animated the growing push for China-Saudi renminbi settlement. It has also accelerated Chinese efforts to deepen ties with crude oil suppliers inclined to buck the West.

One of the most effective and longstanding means of financial “de-risking,” however, has been the Chinese central bank’s steady shedding of its official U.S. dollar reserve holdings. This development is important because it will impact Washington’s ability to impose financial sanctions on China in the event of an invasion or blockade of Taiwan.

In recent years, despite escalating financial competition with the United States, Beijing has not been abandoning dollars entirely. Still, only about a third of China’s goods trade is settled in renminbi. Instead, Beijing has created a new layer of protection for the dollars it needs to sustain the Chinese economy in times of extreme geoeconomic stress. These dollars have been sloughed off the central bank’s balance sheet and pushed down into the country’s sprawling banking system. Here, they are hard for U.S. sanctioneers to find, and more painful for the United States to freeze.

These unofficial reserve dollars have a name — “shadow reserves” — and they offer a strong defense against all but the most aggressive program of anti-China financial sanctions. Beijing’s patient, nearly decade-long expansion of shadow reserves poses a major obstacle to financial sanctions aimed at China. The diversification of Beijing’s dollar holdings means that countermeasures designed to target these dollars must strike at a wider swath of China’s economy than would otherwise have been the case. To get at these dollars in any comprehensive way, U.S. officials would have to freeze the dollar balances of China’s two major sovereign wealth funds, as well as those of marquee Chinese international state-owned enterprises and policy banks. This is a difficult task in itself. What’s more, though, since banks and investment firms on Wall Street are deeply entangled with Chinese entities of this size, the pain imposed by such sanctions cannot be reliably contained.

Read the full op-ed in War on the Rocks.