It's not a belief that keeps things the way they are. It's the fear of loss. Loss of reserve value, loss of the reserves themselves
Well, you have to really believe in the Fed in order to think that the dollar will not collapse. By keeping their reserves, they risk losing much more.
That will prove true, eventually. In the meantime, 'normalcy bias' limits the logical conclusions here.
They know that their populations' recent well being is built upon a house of cards called "international trade" and fear a great "chinese recall election" if they are seen as even remotely connected to the fall. Sticking it to the US isn't a powerful enough motive.
Why?
The Chinese improve has not so much to do with the US buying their stuff with dollars but much more the Chinese being able of producing these stuff in the first place. They should stop accepting subsidizing the dollar and start feeding their own internal market with their production. It's true that their internal market demand is probably not the same of that of US and therefore the capital structure would have to change, what can be a bit painful. But it would be in their own benefit. They should really stop being mercantilists and let the Chinese people enjoy more the increase in capital the country has gone through.
What you are discribing is "decoupling", and might yet happen, but there is little evidence that it's going to happen in the next several years. As it is, China's industrial base is strongly tuned to the manufacture of products intended for export, and it's no small thing to retool such an industrial base to serve a completely different culture.
Not to mention the reserves they're sitting on are a bomb...
Again, normalcy bias prevails. It's been a bomb for decades, and yet it is inarguable that the Chinese people are overall better off today than if they had simply never started working for the Western nations in this capacity. The risk is real, but the possibility that their is still much more gain to be had is also real. Like playing Russian Roulette and you are on the fourth pull; sure it's dangerous, but there are still two more chambers left.
I think the Chinese government has somehow realized the problem they've put themselves in, they just won't admit or take desperate actions. But they're slowly acquiring gold for example, they've strongly shifted from US long-term bonds to short-term ones etc.
Yes, there are certainly signs that the Chinese are hedging against a future wherein the US FRN is no longer a trusted reserve currency. This does no mean that
they are willing to be the first one's to take the leap.
