Search Penny Hill Press

Wednesday, August 28, 2013

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

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
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.

Chinas 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 worlds 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 Chinas holdings of U.S. securitiesthese
totaled nearly $1.3 trillion as of June 2013.

Chinas 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 “safetyof Chinas 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 Poors 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 Chinas 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 Chinas currency, which could lessen the need to hold U.S. assets.

Some U.S. policymakers have expressed concern over the size of Chinas 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 Chinas 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 Chinas 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 Chinas
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

To Order:

RL34314.pdf   to use the SECURE SHOPPING CART


Phone 301-253-0881

For email and phone orders, provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.