Wayne M. Morrison
Specialist in Asian Trade and Finance
Marc Labonte
Specialist in Macroeconomic Policy
Given its relatively low savings rate, the U.S. economy depends heavily on foreign capital
Specialist in Asian Trade and Finance
Marc Labonte
Specialist in Macroeconomic Policy
Given its relatively low savings rate, the U.S. economy depends heavily on foreign capital
inflows from countries with high
savings rates (such
as China) to meet its
domestic investment
needs and to fund the
federal budget deficit. The willingness of
foreigners to invest in the U.S. economy and purchase U.S.
public debt has helped
keep
U.S. real interest rates low.
However, many economists contend that U.S. dependency on
foreign savings
exposes the U.S. economy to
certain risks,
and some argue that
such low-cost capital inflows
were
a contributing factor to the
U.S. housing bubble and subsequent
global financial crisis that began
in 2008.
China’s policy of
intervening in currency markets to
limit the appreciation
of its currency against the dollar (and other currencies) and
large current account surpluses
have made it the world’s
largest and fastest growing holder
of
foreign exchange reserves,
especially dollar-denominated assets.
China has invested
a large share
of
these reserves in U.S.
private and public securities, which
include long-term (LT) Treasury debt,
LT
U.S. agency debt, LT U.S. corporate debt, LT
U.S. equities,
and short-term debt. As of June
2012, China was the
second largest holder
of
U.S. securities
(after Japan) at nearly $1.6
trillion (down
from
$1.7 trillion as
of June 2011).
U.S.
Treasury securities constitute the largest category of China’s holdings
of U.S. securities—these
totaled
nearly $1.3 trillion as
of June 2013.
China’s large
holdings of U.S. securities have raised a number of concerns in
both China and the United
States. For
example, in 2009,
(then) Chinese Premier Wen Jiabao stated that
he was “a little worried” about the
“safety” of China’s holdings
of
U.S. debt. The sharp debate in
Congress over raising the public debt ceiling in the summer of 2011
and the subsequent downgrade
of the
U.S. long-term sovereign credit from AAA to AA + by Standard
and Poor’s in August 2011 appears to have
intensified Chinese
concerns. In addition,
Chinese officials
have criticized U.S.
fiscal and
monetary policies, such
as quantitative
easing by the
U.S. Federal Reserve, arguing that
they could lead to higher U.S. inflation and/or a
significant weakening
of the dollar,
which could reduce
the value of China’s U.S. debt
holdings in the future. Some
Chinese analysts have urged the
government to
diversify its reserves away from U.S. dollar assets, while others have
called for more rapid appreciation of China’s
currency, which
could lessen the need to hold U.S. assets.
Some
U.S. policymakers have expressed
concern
over the size of China’s
holdings of U.S. government
debt. For example, some contend
that China might
decide to sell a large share of its
U.S. securities holdings, which
could induce other foreign
investors to sell off
their
U.S. holdings
as well, which in turn could destabilize the U.S.
economy. Others argue
that China could
use its large
holdings of U.S. debt as
a bargaining chip in its dealing with the United States.
Other U.S. policymakers contend that China’s holdings
of U.S. debt give it little leverage over
the United States, because as long as China continues to
hold down the value of its currency to the U.S. dollar, it will have
few options other than
to keep investing in U.S. dollar assets. A Chinese attempt to sell a large portion of its dollar holdings
could reduce the value of its remaining dollar
holdings, and any subsequent negative shocks
to the
U.S. (and global)
economy could dampen
U.S. demand for Chinese exports. They contend that the
main issue for U.S. policymakers is
not China’s large
holdings of U.S. securities
per se, but rather the
high U.S. reliance
on foreign
capital in general,
and whether such borrowing is sustainable. This report examines
China’s
holdings
of U.S. securities and
its implications
on the U.S. economy and U.S.-China relations.
Date of Report: August 19, 2013
Number of Pages: 22
Order Number: RL34314
Price: $29.95
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