US Government Debt Different - Finance Department - University of ...

Richard J. HerringGovernment bonds (see Figure 7). This has led to Chinese holdingsof U.S. Government Treasury and Agency securities that approach40% of the outstanding amount. The size and persistence of the imbalancesbetween the U.S. and China, the two largest economiesin the world, has led to mutual suspicion and discomfort. On theone hand, the Chinese are deeply ambivalent about their holdingsof dollars. They are very concerned with maintaining the purchasingpower of their huge stock of dollar assets and resent the pressurethat dollar inflows put on their monetary policy, requiring increasinglyaggressive measures to sterilize inflows to avoid a higher rate ofinflation than they prefer. On the other hand, they are reluctant tolet the yuan float because control over the exchange rate has been animportant tool of stimulating growth and maintaining high levels ofemployment.31Figure 7: China has Accumulated huge holdings of US Government BondChinese Holdings* of Treasury Securities40% 1,600Chinese + United Kingdom Holdings (RHS)Year over Year Change (LHS)1,500Year over Year Change (%)30%20%10%1,4001,3001,2001,1001,000Billions ($)9000%Oct-09 Apr-10 Oct-10Apr-11800Oct-11*Includes Chinese + United Kindgom HoldingsIn contrast, factions in the U.S. hold two distinctly inconsistentviews. One faction fears the potential leverage that might be inherentin such a heavy concentration of claims on the U.S. governmentheld by one foreign government. They fear that a threat to disruptfinancial markets might be used by the Chinese to gain politicaladvantage. The other faction is concerned that the Chinese might