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China’s Mercantilist Strategy Creates Imbalances

By Heide B. Malhotra

Epoch Times Staff Created: March 10, 2010 Last Updated: March 10, 2010

WASHINGTON—In the beginning of January, China—with $755 billion in U.S. Treasury securities—slipped to the second-largest lender to the United States, about 1.82 percent behind Japan, according to a recent testimony before the U.S.-China Economic and Security Review Commission (USCC).

But those numbers are vastly understated, according to analysts. In reality, China’s holdings are close to $1 trillion, and far more than what’s recorded on U.S. Treasury books. China buys securities through intermediaries in countries other than China, which hides the ultimate buyer’s identity.

“The U.S. 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,” according to testimony by Simon Johnson, professor at MIT Sloan School of Management, at the February U.S.-China Economic & Security Review Commission hearing.

The U.S. Treasury notes on its Web site that the statistical information it publishes may be incorrect because the owner, in this case China, may keep foreign currency earnings in foreign bank accounts, which in turn is used to buy the securities. The Treasury only records the country in which the securities are kept or from where payments are received.

Dumping U.S. Securities

The media promoted all kinds of scenarios when China’s holdings declined by roughly $50 billion in mid-2009, and worry-mongering hit the airwaves again later on in that year, which—looking back—was no more than sensationalism at its best.

The Chinese are well aware that if they start a sell-off of U.S. securities, the value of the securities would drop, resulting in substantial losses.

Economic theory advocates that if any government with large holdings in U.S. Treasury...