Should We Fear China?

huffingtonpost.com — China is the largest holder of official foreign currency reserves in the world, currently estimated to be worth around $2.4 trillion -- an increase of nearly $500 billion in the course of 2009 (on the back of a current account surplus of just under $300 billion, i.e., 5.8 percent of China's GDP, and a capital account surplus of around $100 billion). These reserves are accumulated through arguably the largest ever sustained intervention in a foreign exchange market -- i.e., through The People's Bank of China buying dollars and selling renminbi, and thus keeping the renminbi-dollar exchange rate more depreciated than it would be otherwise.

China is also currently the second largest holder of US Treasury Securities -- at the end of December 2009, it held $755.4 billion -- just behind Japan (which had $768.8 billion).

The US Treasury data almost certainly understate Chinese holdings of our government debt because they do not reveal the ultimate country of ownership when instruments are held through an intermediary in another jurisdiction.

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