China's Holding of U.S. Securities: Implications for the U.S. Economy [September 26, 2011] [open pdf - 360KB]
"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 have helped keep U.S. real interest rates relatively low, which, until recently, contributed to rapid U.S. economic growth. However, many economists contend that U.S. dependency on foreign savings was a contributing factor to the U.S. housing bubble and subsequent global financial crisis. China's policy of intervening in currency markets to limit the appreciation of its currency against the dollar (and other currencies) has made it the world's largest and fastest growing holder of foreign exchange reserves, which totaled $3.2 trillion as of June 2011. […] Many analysts argue that China's holdings of U.S. debt give it little leverage over the United States, arguing that as long as China continues to peg its currency mostly to the U.S. dollar, it will have few options other than to keep investing in U.S. dollar assets. Any attempt by China 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, including in the public debt, and whether that reliance is sustainable."
CRS Report for Congress, RL34314