It therefore depends on countries with high savings rates, such as China, to invest some of their capital in the United States. In order to limit the appreciation of China's currency, the renminbi (RMB), against the dollar, China must purchase U.S. dollars. Rather than hold dollars (and other foreign currencies), which earn no interest, the Chinese central government has converted some level of its foreign exchange reserve holdings into U.S. financial securities, including U.S. Treasury securities, U.S. agency debt, U.S. corporate debt, and U.S. equities. China's holdings of U.S. public and private securities were estimated by the Federal government to total nearly $1.6 trillion as of June 2012. As of June 2013, these totaled $1.28 trillion. Some U.S. policymakers have expressed concern that China's large holdings of U.S. securities could pose a risk to the U.S. economy, especially if China attempted to divest itself of a large share of its holdings. This report examines the importance to the U.S. economy of China's investment in U.S. securities, as well as the policy implications of its holdings for both the United States and China. For the United States, the issue of China's large holdings of U.S. securities is part of a broader question that has been raised by many economists: what are the implications of the heavy U.S. reliance on foreign investment in U.S. securities finance capital investment by firms, household borrowing, and the government budget deficit? China was the largest foreign holder of LT Treasury debt at 24.4% of total (down from 32.2% in June 2011). Still others contend that China's purchases of U.S. securities were a major contributing factor to the U.S. sub-prime mortgage crisis and subsequent global economic slowdown because such purchases helped to keep real U.S. interest rates very low and increased global imbalances. Chinese officials, on the other hand, have expressed concerns over the safety of their large holdings of U.S. debt, and some have argued that China should either diversify away from U.S. Treasury securities or implement policies that slow the accumulation of FX reserves, which would lessen the need to buy U.S. assets. Growing Bilateral Tensions over the U.S. Public Debt

Since the beginning of the global financial crisis in 2008, U.S. government officials have increasingly sought to offer assurances to Chinese officials regarding the safety of China's holdings of U.S. government debt securities and to encourage China to continue to purchase U.S. securities. The recent contentious U.S. debates in Congress over raising the debt ceiling and over how to address long-term U.S. debt issues, along with the downgrade of the long-term sovereign credit rating of the United States from AAA to AA + by Standard and Poor's in August 2011, appear to have intensified China's concerns over its U.S. debt holdings. First, a large sell-off of China's U.S. holdings could diminish the value of these securities in international markets, which would lead to large losses on the sale, and would, in turn, decrease the value of China's remaining dollar-denominated assets. The bills state, for example, that under certain circumstances, China's holdings of U.S. debt could give it a tool with which it can try to manipulate U.S. domestic and foreign policymaking, including the U.S. relationship with Taiwan; and that China could attempt to destabilize the U.S. economy by rapidly divesting large portions of its holdings of U.S. debt instruments. What might happen if China no longer purchased U.S. securities and/or tried to sell a significant share of its dollar holdings? Since China held about $1.6 trillion of U.S. private and public securities (largely U.S. Treasury securities) as of June 2012, any reduction in its U.S. holdings could potentially be large. For the U.S. economy, this issue is manifested namely in its low savings rate and thus its dependence on foreign saving to finance its investment needs and federal budget deficits. Some economists contend that, although the low U.S. savings rate is a problem, the U.S. current account deficit and high levels of foreign capital flows to the United States are also reflections of the strength of the U.S. economy and its attractiveness as a destination for foreign investment, and therefore discount the likelihood that foreign investors will suddenly shift their capital elsewhere. Some Chinese analysts have argued that the debt problems in Europe and the United States will decrease their demand for Chinese products, and that a depreciating dollar will lower the value of Chinese dollar assets.
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.
China's 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 world's 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 China's holdings of U.S. securities—these totaled nearly $1.3 trillion as of June 2013.
China's 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 "safety" of China's 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 Poor's 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 China's 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 China's currency, which could lessen the need to hold U.S. assets.
Some U.S. policymakers have expressed concern over the size of China's 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 China's 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 China's 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 China's holdings of U.S. securities and its implications on the U.S. economy and U.S.-China relations.