Since economic reform in the 1980s, China keeps buying U.S. Treasury Bonds for more than 3 decades. What’s more, the US trade deficit with China is the largest in the world (about 30 billion per month) which is usually regarded as a sign of global economic imbalance (census.gov 2016). While China’s huge holding of U.S. securities is widely evaluated as a nuclear bomb, below are the big reasons behind the long-term national behavior:-
Maintain an ‘export-led growth’ model
Japan started the Asian model of export-led growth, the model was soon adopted by other Asian countries including Singapore, Hong Kong, South Korea and Taiwan in the 1960s. Two decades later, China’s reform and opening up of its market was commonly considered as an extension of the export-led growth model (Hsu 2016) The basic logic is that, Chinese manufacturers produce and sell cheap commodities to developed markets (such as U.S.) in exchange for foreign currencies (e.g. US dollars), but since the Chinese manufacturers need local currency to settle debts and pay salaries, they sell foreign currencies for Chinese yuan which raise demand for yuan in the market which create pressure for Chinese Yuan to appreciate. In order to maintain the ‘export-led growth’ working, the central bank ‘People’s Bank of China’ keeps purchasing foreign currencies from the Chinese companies resulting in a cheap Chinese Yuan in the market. Therefore, one main reason why China keeps holding more and more U.S. securities is that China has a sustainable income of U.S. dollars.
U.S. Treasury securities are the world’s safest investment
U.S. government securities serve as one of the world’s safest investment due to the fact that the U.S. government has never intentionally defaulted on its debts due. The U.S. treasury securities are supported by the “full faith, credit, and taxing power of the U.S. government” that ensures timely payment of principal and interest (Garman & Forgue 2015). Since 2008, when China overtook Japan as the biggest holder of holder of denominated financial assets, China has become the largest foreign owner of U.S. Treasury securities, accounting for about 22 percent of all U.S. Treasuries held by non-Americans. No doubt that U.S. government securities are the safest investment destination for China to invest its huge foreign-exchange reserves to generate interests.
Available with a wide range of maturity dates
Another advantage of Treasuries is that they are available with a wide range of maturity dates. This allows China as an investor to structure a portfolio to specific time horizons. This feature is extremely convenient to China because China has an income about US $30 billion per month (from the trade deficit). In addition, purchasing the U.S. securities also strengthen the currency supply in China as well as the image of China as a highly trusted and stable market which is well prepared for any uncertainties or crisis.
Potential power to influence the U.S. economic or political policies
A number of U.S. economists and members of Congress did concern about a loss of economic sovereignty Beijing. China is theoretically able to destroy the economy of United States by dumping all the U.S. securities it currently owns. Alternatively, China can simply show its influence in the key decision-making in the U.S. by threatening to dump the U.S. Treasury securities.
List of reference
census.gov 2016 U.S. trade in goods with China [online] accessed on 21 Mar 2016, available: https://www.census.gov/foreign-trade/balance/c5700.html
Garman, E. T. & Forgue, R. 2015 Personal Finance. Boston: Cengage Learning
Hsu, S. 2016 Economic Reform in Asia: China, India, and Japan. Northampton: Edward Elgar Publishing