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

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Congressional rept.

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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 yuans appreciation. As a result, China has become the worlds 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 2007, totaled 922 billion, making China the 2nd largest foreign holder of U.S. securities after Japan. These securities include long-term Treasury debt, U.S. agency debt, U.S. corporate debt, U.S. equities, and short-term debt. 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 July 2008, Chinas Treasury securities holdings were 519 billion, accounting for 19.4 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. policy makers 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 have reportedly suggested that China could dump or threaten to dump a large share of its holdings to prevent the United States from implementing trade sanctions against Chinas 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 returns. The recent U.S. credit crisis has heightened U.S. concerns that China might reduce its U.S. asset holdings.

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  • Economics and Cost Analysis
  • Government and Political Science

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