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Confronting the China-U.S. Economic Imbalance


China has stepped up its purchases of U.S. Treasuries in recent years, making it the biggest foreign holder of U.S. debt. By many expert accounts, this has fueled a relationship of dependency between the United States and China, whereby China has lent to the United States to help fuel its export industry, while U.S. consumers in turn have demanded more exports and further access to cheap credit. This relationship attracted increasing scrutiny in the aftermath of the global financial crisis as the United States' massive stimulus outlays and loose monetary and fiscal policies fueled doubts about the U.S. economy and the value of U.S. debt. China's $586 billion in stimulus spending bolstered its weakening export industry and raised concerns about whether China will continue to buy U.S. debt. Meanwhile, Chinese officials have made calls to replace the dollar's role as an international reserve currency with the International Monetary Fund's Special Drawing Right, and trade tensions between the United States and China have grown over products such as tires and poultry. Some experts warn economic and political pressures could lead both countries to adopt more protectionist policies at a time when the global economic recovery remains fragile.

China's U.S. Debt Holdings

China holds roughly $1.5 trillion in U.S. assets, at least 65 percent of China's total foreign assets, according to a May 2009 paper by economist Brad Setser, a former CFR fellow and now senior director for the White House's National Economic Council. This represents enormous growth in its U.S. dollar holdings over the past decade, which, in January 2001 amounted to less than $100 billion. Experts debate the causes of this buildup, though it is clear that a flood of foreign capital into China has been a major contributing factor. Many...

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