China's Holdings of U.S. Securities: Implications for the U.S. Economy
Abstract
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 help promote growth and to fund the federal budget deficit. China has intervened heavily in currency markets to limit the yuan's appreciation. As a result, China has become the world's largest and fastest growing holder of foreign exchange reserves (FER), which totaled $1.5 trillion at the end of 2007. China has invested a large share of its FER in U.S. securities, which, as of June 2006, totaled $699 billion, making China the 2nd largest foreign holder of U.S. securities after Japan. These securities include Treasury debt, U.S. agency debt, U.S. corporate debt, and U.S. equities. U.S. Treasury securities are issued to finance the federal budget deficit. Of the public debt that is privately held, about half is held by foreigners. As of December 2007, China's Treasury securities holdings were $406 billion, accounting for 17.2% of total foreign ownership of U.S. Treasury securities and making China the second largest foreign holder of U.S. Treasuries after Japan. Some U.S. policymakers have expressed concern that China might try to use its large holdings of U.S. securities, including U.S. public debt, as leverage against U.S. policies it opposes. For example, various Chinese government officials are reported to have suggested that China could dump a large share of its holdings to prevent the United States from implementing trade sanctions against China's currency policy. Other Chinese officials have reportedly stated that China should diversify its investments of its foreign exchange reserves away from dollar-denominated assets to those that offer higher rates of return. If China were to unload a large share of its U.S. securities holdings, it could have a significant negative impact on the U.S. economy, which makes the issue of China's large holdings of U.S. securities of concern to Congress.
Document Details
- Document Type
- Technical Report
- Publication Date
- Feb 27, 2008
- Accession Number
- ADA481885
Entities
People
- Marc Labonte
- Wayne M. Morrison
Organizations
- Library of Congress