Academic journal article Current Politics and Economics of Northern and Western Asia

China's Holdings of U.S. Securities: Implications for the U.S. Economy *

Academic journal article Current Politics and Economics of Northern and Western Asia

China's Holdings of U.S. Securities: Implications for the U.S. Economy *

Article excerpt


China's economic policies, including those that induce high levels of domestic savings and promote export-related activities as the main engine of China's economic growth, have contributed to a surge in China's FX reserves over the past decade, as indicated in Table 1.

China's exchange rate policies attempt to slow (and sometimes halt) the appreciation of the RMB against the dollar. This makes Chinese exports less expensive, and foreign imports into China more expensive, than would occur if China maintained a floating currency. The main purpose of this policy is to promote China's export industries and encourage foreign investment. To that end, the Chinese central bank must intervene heavily in currency markets by buying up as many dollars as necessary to meet the government's targeted RMB-dollar exchange rate.6 Chinese policies that induce high savings rates dampen domestic consumption and demand for imports, while shifting financial resources (i.e., low-cost bank credit) largely to export-oriented industries. As a result, China consumes much less than it produces. Such policies have contributed to China's large annual trade surpluses. The combination of China's large trade surpluses ($185 billion in 2010), inflows of foreign direct investment into China ($106 billion in 2010), and inflows of "hot money" into China have been the main components of China's accumulation of FX reserves.7

According to Chinese government figures, its FX reserves rose from $216 billion in 2001 to $3.2 trillion as of June 2011, an increase of nearly $3 trillion or 1,383%.8

China's FX reserves in June 2011 were up $350.2 billion over December 2010 levels. China's reserves as a percent of nominal GDP grew from 15.3% in 2001 to 48.4% in 201 0-an unusually high level for a large economy. A listing of the world's top holders of FX reserves as of June 2011 is shown in Figure 1. Not only was China by far the world's largest holder of FX reserves, its reserves were greater than the combined reserves of Japan, Russia, Saudi Arabia, Taiwan, Brazil, and South Korea. (Besides Japan, these countries had much smaller economies than China).


Although the Chinese government does not make public the dollar composition of its FX holdings, many analysts estimate this level to be around 70%.10 U.S. assets have generally been favored by China for its investment needs for a number of reasons. First, in order to maintain the exchange rate effects that lay behind the acquisition of U.S. dollars, those dollars must be invested in dollar-denominated securities. Second, the United States is the world's largest economy and has the biggest capital market.

In 2009, the combined value of U.S. private and public debt securities was $31.7 trillion (compared with $11.9 trillion for Japan and $5.7 trillion for Germany) and accounted for 34.4% of global debt securities. Many analysts contend that the U.S. debt securities market is the only global market that is big enough to absorb a big part of China's large and growing FX holdings. U.S. securities have also been favored by China because, historically, they have been considered to be safe and liquid (i.e., easily sold) relative to other types of investments.11

Finally, U.S. Treasury securities are backed by the full faith and credit of the U.S. government, which guarantees that interest and principal payments will be paid on time. The global economic slowdown and the European sovereign debt crisis may have also boosted the attractiveness of U.S. securities for China.12 According to China's State Administration of Foreign Exchange (SAFE), its main principles for administrating China's FX reserves are "security, liquidity, and increases in value, among which security is the primary principle." 13

U.S. financial securities consist of a mix of securities issued by the U.S. government and private sector entities and include long-term (LT) U. …

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