While all of the BRICs – Brazil, Russia, India and China – have increased their holdings of foreign exchange reserves since 2000, China is easily the largest holder of US financial assets. Brad W Setser, fellow for geoeconomics at the Council on Foreign Relations, and Arpana Pandey, a research associate at the Council, write that “when it comes to financing the United States, China stands apart.” Their analysis demonstrates that demand for US Treasuries remains strong, but there is some question (given the readiness to rapidly reallocate assets) as to whether the financing of the US will be sustained.
In a separate report, the authors examine China’s external portfolio. With $1.95 trillion in foreign exchange reserves largely denominated in dollars, China has “the largest stockpile of foreign exchange in the world” and it is America’s largest creditor – China’s $1.5 Trillion Bet.
“China’s government is now by far the largest creditor of the United States: the US data suggests that China lent around $400 billion (roughly $35 billion a month) to the United States in 2008. Never before has a relatively poor country lent out so much money to a relatively rich country. And never before has the United States relied on a single country’s government for so much financing.
“China’s outsized impact on global capital flows is a relatively recent development – one directly tied to China’s policy of managing its exchange rate against the dollar.”
The two economies are intimately linked.
Graphic from the Council on Foreign Relations.