China's Foreign Reserves Dilemma

Chinese policymakers are faced with the challenge of diversifying their foreign currency holdings. While the U.S. is rushing to legislate the borrowing limit, China must make some tough decisions regarding its portfolio. From the China Daily:

Derek Scissors, research fellow in Asia Economic Policy at The Heritage Foundation, said that Beijing will probably just store money in simple bank deposits both at home and overseas until the US budget situation is resolved. “The debt standoff is first and foremost about irresponsible government-not just right now but for a decade by both parties, both houses of Congress, and two presidents,” he said.
“Beijing is probably not buying Treasuries as intensely as it did last year.”

Ordinary Chinese have voiced their criticisms at the debt ceiling debate impasse. From CBS News:

Not surprisingly, the idea that their government is investing Chinese money in assets that are losing value creates a great deal of concern for a lot of Chinese, and a great deal of anger, explains Peking University finance professor Michael Pettis.

The whole episode has greatly boosted Chinese awareness of the interdependence of the two nations’ economies. Beijing funds U.S. government debt by its purchase of U.S. Treasurys, propping up the American economy so U.S. consumers will continue buying products manufactured in China, keeping China’s economy growing too.

Chinese officials are trying to get some political mileage out of the U.S. debt debacle. They’ve publicly criticized Washington’s growing financial problems, though few believe the Chinese government was ever truly worried its U.S. debt holdings would go belly-up.