China, America’s largest creditor, increased its holdings of U.S. debt to a record $1.175 trillion in October, according to revised data issued by the Treasury.The Asian nation’s investment totaled $1.16 trillion at year-end, the Treasury Department reported yesterday, raising the figure from the previous $891.6 billion. Japan maintained its place as America’s second-largest lender, with $882.3 billion of Treasuries at year-end, compared with $883.6 billion before the revision.
China buys Treasuries with the dollars it takes in by selling yuan to keep its currency from strengthening, and with the funds it earns from exports.
Chinese President Hu Jintao told business executives in Washington in January that closer ties between his country and the U.S. were critical amid a “tortuous” global economic recovery.
This news once again reveals the extent of economic interdependency between the US and China. China’s purchase of US Treasury bonds, along with its growing domestic inflation, has led to speculation that the yuan will definitely appreciate in the near future. Yesterday, US Treasury Secretary Timothy Geithner addressed this topic before the Senate Foreign Relations Committee. From the Wall Street Journal:
“The risk for them if they slow the pace of appreciation is that inflation will accelerate further,” Geithner told the Senate Foreign Relations Committee. “That’s why it’s inevitable that they continue to move, and of course, we want that move as quickly as possible.”
If they slow the pace of appreciation against the dollar, inflation is still running substantially above the U.S., by some measures three times the rate of growth in the U.S., the secretary said.
Including inflation, the yuan is appreciating against the dollar at an annual rate north of 10%, Geithner said. “If that were sustained, again, that’s a huge shift over time,” he said.
If it occurs, the yuan’s appreciation will undoubtedly affect the global economy.