During the US government shutdown and the impending
deadline for the raising of the federal debt ceiling, Chinese officials
expressed concern about the risk of default and the implications for its
holdings of US debt. What is that exposure? Menzie D. Chinn, a professor of
public affairs and economics at the University of Wisconsin, Madison, said
last week in an issue of the International New York Times: "Foreign entities - -
governments, companies and individuals - - hold nearly half of the publicly held
debt owed by the United States. Of China’s $3.6trn in foreign exchange reserves,
about 60% is estimated to be held in US government securities." This is not
correct as the ratio of Chinese reserves invested in US public and private
securities in 2012 was below 50%.
On October 17 the United States was expected to reach
its debt limit of $US16.699tn and the drama temporarily ended on that Thursday,
when the US Congress passed a measure and
the president signed it extending the debt limit through February 7, 2014
without specifying a new limit.
However, the debt held by the public (including
foreign residents and the Federal Reserve) is currently about $12tn and in 2013,
this debt as a ratio of gross domestic product is 75%
The difference between the total of $12tn and the
debt ceiling is accounted for by funds such as the Social Security trust fund --
in effect debt that the government owes to itself.
Debt owned by the public ex Federal Reserve
debt was $10tn at the end of 2012; foreign holdings of US Treasury debt was at
$5.6tn - - a
ratio of 56.2.%
China held $1.2tn of Treasuries accounting for 21.9%
of foreign-owned debt and 12% of public held debt, excluding Federal Reserve
held debt that was worth 1.2tn in 2012.
The Congressional Research Service says the latest
Treasury survey of portfolio holdings of US securities was issued on April 30,
2002 to June 2011, China’s
purchases of US Treasury securities increased more rapidly than that any other
country, rising from $181bn to $1.73tn. In June 2009, China overtook Japan as
the largest holder of US securities, and China remained the largest holder
through June 2011. As indicated in Figure 2 (above), as China’s FX reserves have
risen, so have its holdings of US securities. However, China’s holdings of US
securities decreased by $143bn from June 2011 to June 2012 -- the only time in
the last ten years that its holdings dropped.
China has invested a large share of these reserves
in US private and public securities, which include long-term (LT) Treasury debt,
LT US agency debt (such as federal mortgage financiers), LT US corporate debt,
LT US equities, and short-term debt.
As of June 2012, China was the second largest holder
of US securities (after Japan) at nearly $1.6tn (down from $1.7tn as of June
2011). US Treasury securities constitute the largest category of China’s
holdings of US securities - - these totalled nearly $1.3tn as of June 2013.
According to Chinese government figures, its FX
reserves rose from $212bn in 2001 to $3.34tn in 2012, a $3.1tn increase and an
average annual growth rate of 28.7%.
So in 2012, 47.4%
of China's reserves were invested in US public and private securities and
shares. China likely
held more dollars on deposit. It also holds euros.
China’s foreign exchange reserves rose to a record
$3.66tn in the third quarter of 2013.
In 2007 China allocated $200bn to create China
Investment Corporation, a new sovereign wealth fund that invests in foreign
equities, bonds and other assets. The Wall Street Journal says CIC had $575bn
under management at the end of 2012, according to its annual report, and held
stakes in everything from London’s Heathrow Airport to the Moscow stock
Major Foreign Holders of US Securities
Foreign Holdings of Federal Debt --
Congressional Research Service report June 2013
China’s Holdings of U.S. Securities: Implications for the U.S. Economy --
Congressional Research Service report August 2013
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