China, Debt, and Influence
Conn Carroll /
Speaking at his annual press conference, Chinese Premier Wen Jiabao expressed concern about the outlook for U.S. government debt: “We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I’m a little bit worried. I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets.”
China does hold $1.946 trillion in foreign-exchange reserves, two-thirds of which is believed to be held in Treasury bonds and other agency debt (think Fannie Mae securities). But as the Wall Street Journal’s Andrew Peaple explains, China’s status as the largest buyer and holder of our debt does not really empower them much:
Rhetoric aside, it bears repeating that China will find it hard to make a meaningful shift out of Treasurys, the prime current channel for investment of its $1.95 trillion foreign exchange reserves. Some say China could switch holdings into gold — but that market’s highly volatile, and not large enough to absorb more than a small proportion of China’s reserves. It’s not clear, meanwhile, that euro, or yen-denominated debt is any safer, more liquid, or profitable than U.S. debt — key criteria for China’s leadership. (more…)