In recent years, the United States has had to finance its federal and budget deficit as well as private capital needs by borrowing from other nations due to its low saving rates. Countries like China have enjoyed high savings rates are now investing part of their capital into the economy of the United States (Morrison & Labonte, 2011). These types of investments are important to the U. S. economy help in keeping interest rates low. In addition, such borrowing also enables the United States to increase its consumption patter even as its rate of producing goods and services remains low.
A report by the International Monetary Fund (IMF) shows that in the 2009 financial year, the United States borrowed 38 percent of the global foreign capital. As a result, the country became the largest importer of foreign capital. At the same time, China became the leading exporter of foreign capital, at 24.2 percent (Morrison & Labonte, 2011). The United States has also increased its privately- held public debt from $ 3.3 trillion in the 2001 financial year to $ 9.0 trillion in the 2010 financial year. Already, more than half of the country’s privately-held public debt is held by foreigners, and this has been a source of concern for many analysts who argue that the United States is increasingly becoming over-reliant on foreign savings. Analysts argue that such a strategy might not be sustainable in the long-run as it could weaken our economic interest with time.
The federal government uses U.S. Treasury securities to finance their budget. Already, a major percentage of the U.S. securities are owned by China through its foreign exchange holdings. By June 2011, China had accumulated its contribution to $ 1.17 trillion. This is approximately a quarter of the cumulative foreign holdings in the U.S. Treasury securities. Already, a number of policymakers are sounding warning bells that China’s large foreign exchange holdings in U.S. Treasury securities could endanger our economy in case China decided to offload a large portion of its investment or stop buying those securities altogether. Other policymakers contend that as China continues to increase its holdings in U.S. Treasury securities, the country is in fact gaining leverage over the United States on not just economic issues, but also the noneconomic ones (Elwell, Labonte & Morrison, 2007). In contrast, many analysts argue that taking into account the present state of the global economy it makes a lot of sense for China to invest in U.S Treasury securities as it they are easier to invest in compared with foreign holdings.
These analysts further contend that in case China decided to offload a large portion of its current investment in the U.S. Treasury securities, this would effectively lower the value of its other investments and in the process, the global economy could be destabilized (Morrison & Labonte, 2011). Consequently, China’s economy would be affected negatively. As such, one can postulate that the Chinese and U.S. economies are mutually dependent and on that basis, China has very limited leverage against the United States.
Analysts estimate that about 70 percent of China’s foreign exchange holdings are in the form of the U.S dollar (Morrison & Labonte, 2011). By and large, China finds U.S. assets favorable to invest in for several reasons. To start with, such an arrangement requires that the dollars acquired be invested in the form of dollar-denominated securities as a way of maintaining the effects of the exchange rate that brought about the acquisition in the first place (Morrison & Labonte, 2011). In addition, the U.S. has the largest capital market in the world not to mention that it is also the leading global economy. Many financial analysts are convinced that the large and growing foreign exchange holding by China can only be accommodated comfortably by the U.S economy and as such, the Chinese government has deemed it necessary to invest in the U.S Treasury securities. Another reason why the Chinese finds U.S securities favorable is because they are considered to be liquid and safe compared with other forms of investments (Elwell et al, 2007). Moreover, the U.S government has backed the Treasury securities and this is a form of guarantee that the principal payments and interests shall be paid within the stipulated time.
Should China acquire a large amount of U.S. Treasury bills on the U.S exchange rates, this is likely to enhance the country’s military position in Asia. This is because China’s strong economic position would put it in good stead to acquire military prowess, effectively making it the most powerful military base in Asia. More importantly, the fact that China has invested a lot of its foreign exchange holding on the U.S Treasury securities means that the two countries are somehow dependent on one another (Morrison & Labonte, 2011). As such, there is the likelihood that China’s quest to gain a strong military y presence in Asia would receive the approval of the United States government. However, we should be careful when dealing with issues of diplomacy because it is highly unlikely that the United States would want to associate itself with the rise of China as a military powerhouse in Asia if such a rise was aimed at stifling the economic and political stability of other economies in the region.
Whether or not the United States decides to back China on such a mission is debatable but what is not in doubt is the fact that China will undoubtedly emerging as a leading military power in Asia by virtue of its strong economic position not just in the region but also globally.
In the past, some Chinese officials have insinuated that the country’s holdings of U.S. debt could be used as a means of fuelling political and economic disputes with the U.S. There have also been allegations by online newspaper articles that China could indeed make the dollar collapse if they so chose by opting to liquidate a big amount of their holdings in the U.S Treasury securities (Elwell et al, 2007). This could only happen in case the United States decided to impose trade sanctions on China. If this were to happen, it is alleged that China would use the threat as a bargaining chip in order to gain more leverage in trade. In case such allegations are not addressed, this is likely to result in chaos and possible adverse consequences. If I were in Congress, I would campaign for the enactment of trade agreements between China and the United States that fosters cooperation and mutual understanding, as opposed to division and misunderstanding. I would be actively involved in the drafting of a bill that would see to it that the terms of trade between China and the United States are in line with the economic individual interests of the two countries.
Elwell, C. K., & Labonte, M., & Morrison, W. M. (2007). Is China a Threat to the U.S. Economy? Web.
Morrison, W. M., & Labonte, M. (2011). China’s Holdings of U.S. Securities: Implications for the U.S. Economy. Web.