Developing Economies

China Rolled The Dice

Remember when Chinese Premier Wen Jiabao warned the U.S. to be careful with his country's investments in America?

As you can see from Brad Setser's rough chart, the U.S. is paying an increasing amount of interest to China. That's because China has loaned more than $1 trillion to the American economy in the form of Treasury bills and Fannie Mae and Freddie Mac bonds.

But, just as Wen worried, the overall rate of return is falling. The U.S. is paying less interest on the dollars it's borrowing. That's a result of the U.S. decision to lower the benchmark interest rate nearly to zero. It's supposed to get the economy going, but it also unnerves players like China with the prospect of inflation. China has been worried that its dollars won't buy as much when the U.S. pays it back; now Chinese leaders can worry about falling returns, too — but as Setser argues, that's the risk they took.

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