China’s Holdings of U.S. Securities:Implications for the U.S – SusanThur – Open Salon

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
appreciation of its currency, especially against the dollar. As a result, China has become the
world’s largest and fastest growing holder of foreign exchange reserves (FER). China has
invested a large share of its FER in U.S. securities, which, as of June 2008, totaled $1.2 trillion,
making China the second largest foreign holder of U.S. securities (after Japan). These securities
include long-term (LT) Treasury debt, LT U.S. agency debt, LT U.S. corporate debt, LT U.S.
equities, and short-term debt. It is likely that China became the largest foreign holder of U.S.
securities by the end of 2008. From June 2002 to June 2008, China’s holdings of U.S. securities
increased by over $1 trillion—far more than that of any other nation.
U.S. Treasury securities are issued to finance the federal budget deficit. Of the public debt that is
privately held, a little more than half is held by foreigners. As of May 2009, China’s Treasury
securities holdings were $802 billion, accounting for 24.3% of total foreign ownership of U.S.
Treasury securities, making it the largest foreign holder of U.S. Treasuries (it replaced Japan as
the largest foreign holder in September 2008).
The current global financial crisis has raised considerable conce