China's Holdings of U.S. Securities: Implications for the U.S. Economy [March 5, 2009] [open pdf - 577KB]
"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 $1,205 billion, making China the 2nd 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. 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 2008, China's Treasury securities holdings were $727 billion, accounting for 23.6% of total foreign ownership of U.S. Treasury securities, making it the largest foreign holder of U.S. Treasuries (replacing Japan in September 2008). [...]The issue of China's large holdings of U.S. securities is part of a larger debate among economists over how long the high U.S. reliance on foreign investment can be sustained, to what extent that reliance poses risks to the economy, and how to evaluate the costs associated with borrowing versus the benefits that would accrue to the economy from that practice. This report will be updated as events warrant."
CRS Report for Congress, RL34314