Tuesday, January 15, 2008
[IWS] CRS: CHINA'S HOLDINGS of U.S. SECURITIES: IMPLICATIONS for the U.S. ECONOMY [9 January 2008]
IWS Documented News Service
_______________________________
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor---------------------- Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
________________________________________________________________________
Congressional Research Service (CRS)
Order Code RL34314
China's Holdings of U.S. Securities: Implications for the U.S. Economy
January 9, 2008
Wayne M. Morrison, Specialist In International Trade and Finance, Foreign Affairs, Defense, and Trade Division
Marc Labonte, Specialist in Macroeconomic Policy, Government and Finance Division
http://assets.opencrs.com/rpts/RL34314_20080109.pdf
[full-text, 16 pages]
Summary
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 yuan's appreciation. As a result, China has become
the world's largest and fastest growing holder of foreign exchange reserves (FER),
which totaled $1.4 trillion as of September 2007. China has invested a large share
of its FER in U.S. securities, which, as of June 2006, totaled $699 billion, making
China the 2nd largest foreign holder of U.S. securities (after Japan). These securities
include Treasury debt, U.S. agency debt, U.S. corporate debt, and U.S. equities.
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 October
2007, China's Treasury securities holdings were $388 billion, accounting for 16.8%
of total foreign ownership of U.S. Treasury securities and making China the second
largest foreign holder of U.S. Treasuries after Japan. From March to October 2007,
China's Treasury holdings declined by about 8%.
Some U.S. policymakers 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 are reported
to have 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
China's currency policy. Other Chinese officials have reportedly stated that China
should diversify its investments of its foreign exchange reserves away from dollardenominated
assets to those that offer higher rates of returns.
A gradual decline in China's holdings of U.S. assets would not be expected to
have a negative impact on the U.S. economy (since it be matched by increased U.S.
exports and a lower trade deficit). However, some economists contend that attempts
by China to unload a large share of its holdings U.S. securities holdings could have
a significant negative impact on the U.S. economy (at least in the short run),
especially if such a move sparked a sharp depreciation of the dollar in international
markets and induced other foreign investors to sell off their U.S. holdings as well.
In order to keep or attract that investment back, U.S. interest rates would rise, which
would dampen U.S. economic growth, all else equal. Other economists counter that
it would not be in China's economic interest to suddenly sell off its U.S. investment
holdings. Doing so could lead to financial losses for the Chinese government, and
any shocks to the U.S. economy caused by this action could ultimately hurt China's
economy as well.
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.
Contents
China's Foreign Exchange Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
China's Holdings of U.S. Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
China's Ownership of U.S. Treasury Securities . . . . . . . . . . . . . . . . . . . . . . 6
U.S. Concerns Over China's Large Holdings of U.S. Securities . . . . . . . . . . . . . . 7
What If China Reduces its Holdings of U.S. Securities? . . . . . . . . . . . . . . . . . . . . 9
Concluding Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
List of Figures
Figure 1. Breakdown of China's Holdings of U.S. Securities as of June 2006 . . 6
List of Tables
Table 1. China's Foreign Exchange Reserves: 2001-2006 and Estimates for 2007 and 2010 . . . . . . . . . . . . . . . 2
Table 2. Top 5 Holders of Foreign Exchange Reserves and Changes to Holdings From December 2006-September 2007 . . . . . 3
Table 3. Top Five Foreign Holders of U.S. Securities as of June 2006 . . . . . . . . 5
Table 4. Major Foreign Holders of U.S. Treasury Securities: March 2007 and October 2007 . . . .. . . . . . . . . . . . . . . . 7
______________________________
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.
Stuart Basefsky
Director, IWS News Bureau
Institute for Workplace Studies
Cornell/ILR School
16 E. 34th Street, 4th Floor
New York, NY 10016
Telephone: (607) 255-2703
Fax: (607) 255-9641
E-mail: smb6@cornell.edu
****************************************
_______________________________
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor---------------------- Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
________________________________________________________________________
Congressional Research Service (CRS)
Order Code RL34314
China's Holdings of U.S. Securities: Implications for the U.S. Economy
January 9, 2008
Wayne M. Morrison, Specialist In International Trade and Finance, Foreign Affairs, Defense, and Trade Division
Marc Labonte, Specialist in Macroeconomic Policy, Government and Finance Division
http://assets.opencrs.com/rpts/RL34314_20080109.pdf
[full-text, 16 pages]
Summary
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 yuan's appreciation. As a result, China has become
the world's largest and fastest growing holder of foreign exchange reserves (FER),
which totaled $1.4 trillion as of September 2007. China has invested a large share
of its FER in U.S. securities, which, as of June 2006, totaled $699 billion, making
China the 2nd largest foreign holder of U.S. securities (after Japan). These securities
include Treasury debt, U.S. agency debt, U.S. corporate debt, and U.S. equities.
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 October
2007, China's Treasury securities holdings were $388 billion, accounting for 16.8%
of total foreign ownership of U.S. Treasury securities and making China the second
largest foreign holder of U.S. Treasuries after Japan. From March to October 2007,
China's Treasury holdings declined by about 8%.
Some U.S. policymakers 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 are reported
to have 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
China's currency policy. Other Chinese officials have reportedly stated that China
should diversify its investments of its foreign exchange reserves away from dollardenominated
assets to those that offer higher rates of returns.
A gradual decline in China's holdings of U.S. assets would not be expected to
have a negative impact on the U.S. economy (since it be matched by increased U.S.
exports and a lower trade deficit). However, some economists contend that attempts
by China to unload a large share of its holdings U.S. securities holdings could have
a significant negative impact on the U.S. economy (at least in the short run),
especially if such a move sparked a sharp depreciation of the dollar in international
markets and induced other foreign investors to sell off their U.S. holdings as well.
In order to keep or attract that investment back, U.S. interest rates would rise, which
would dampen U.S. economic growth, all else equal. Other economists counter that
it would not be in China's economic interest to suddenly sell off its U.S. investment
holdings. Doing so could lead to financial losses for the Chinese government, and
any shocks to the U.S. economy caused by this action could ultimately hurt China's
economy as well.
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.
Contents
China's Foreign Exchange Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
China's Holdings of U.S. Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
China's Ownership of U.S. Treasury Securities . . . . . . . . . . . . . . . . . . . . . . 6
U.S. Concerns Over China's Large Holdings of U.S. Securities . . . . . . . . . . . . . . 7
What If China Reduces its Holdings of U.S. Securities? . . . . . . . . . . . . . . . . . . . . 9
Concluding Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
List of Figures
Figure 1. Breakdown of China's Holdings of U.S. Securities as of June 2006 . . 6
List of Tables
Table 1. China's Foreign Exchange Reserves: 2001-2006 and Estimates for 2007 and 2010 . . . . . . . . . . . . . . . 2
Table 2. Top 5 Holders of Foreign Exchange Reserves and Changes to Holdings From December 2006-September 2007 . . . . . 3
Table 3. Top Five Foreign Holders of U.S. Securities as of June 2006 . . . . . . . . 5
Table 4. Major Foreign Holders of U.S. Treasury Securities: March 2007 and October 2007 . . . .. . . . . . . . . . . . . . . . 7
______________________________
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.
Stuart Basefsky
Director, IWS News Bureau
Institute for Workplace Studies
Cornell/ILR School
16 E. 34th Street, 4th Floor
New York, NY 10016
Telephone: (607) 255-2703
Fax: (607) 255-9641
E-mail: smb6@cornell.edu
****************************************
# posted by SBasefsky : 12:37 PM
