China’s Holding of US Debt

China currently boasts of the largest foreign holding of US treasury securities worldwide. From October 2010 to March 2011, China had been cutting its holding of US bonds amid fears that the US may default on its debt payment with the recession its economy has been suffering and it budgetary deficits. China has in several statements requested the US government to assure it of the security of its investments.

However in April 2011, China bought more federal securities than it had in the previous month. It is estimated that the increase was by about $7.6 billion. It is therefore unlikely that China will continue cutting its holding of US debt.

One of the reasons is that it is unlikely to get a substitute for US Treasury securities. Chinese government spending is so large that only the US National GDP and financial markets can adequately support it. With its weak currency, china will probably be looking to increase its GDP. China needs high growth to resolve its high unemployment. This would be by a fiscal policy of high government spending and as previously stated, such high spending needs a big economy to sustain it. Continuing to invest in US treasury bonds will maintain the weakness of the currency and this gives China an edge because a weak currency means competitively priced exports. If on the other hand China diversifies its foreign investments, the exchange rate of its currency will appreciate. More indirectly, China also has an interest in the strength of the US economy since they are the largest importers of Chinese goods. It will therefore be unlikely to jeopardize the interest rates which may increase if China fails to buy while the US continues to issue the Treasury bonds. China will therefore not continue cutting its holding.

Reference:

http://money.cnn.com/2011/01/18/news/international/thebuzz/index.htm accessed on 12th July 2011