China has dramatically increased its holdings of U.S. treasury debt (as well as other U.S. dollar-denominated assets) in recent years. Continually racking up large trade surpluses from its giant export sector, China has to find a reliable place to store its $2.85 trillion in foreign exchange reserves and judges that the United States offers the deepest and most stable store possible. By purchasing U.S. debt, China not only gets a better return on its investment than it would if it invested the funds at home or elsewhere but also helps the United States keep interest rates low, perpetuating U.S. consumption habits and therefore consumption of Chinese goods. During the global financial and economic crisis, China surged purchases of short-term U.S. debt as a safe haven, also providing some stability as U.S. deficits ballooned. After the crisis, Beijing began to ease off the short-term holdings, but its long-term holdings remained at near record highs at the end of the third quarter in the United States. Because of excessive U.S. government spending and quantitative easing policies, China has criticized the U.S. dollar's supremacy and asked that Washington improve fiscal policy to safeguard the value of the dollar and take into consideration the effects of its loose monetary policies on foreign states. But contrary to popular rhetoric, Beijing does not have the option of suddenly selling off U.S. debt. Beijing would have trouble finding a foreign buyer that would be capable of buying so much debt; a massive sell-off would reduce the price of the bills and thus weaken the value of China's existing holdings; and the process would drive up interest rates in the U.S. and impair consumption of Chinese exports, precipitating an economic crisis in China. And this does not even mention the political ramifications. Instead, China will continue to buy U.S. t-bills and other dollar-denominated assets while also seeking to diversify the other roughly one-third of its foreign exchange reserves to buy other assets such as the euro, Japanese yen, British pound and others.
