China Keeps Piling Up U.S. Dollars : Planet Money At the current pace, China will hold more than $1 trillion of U.S. Treasurys in about a year. The relatively poor nation of China continues to lend money to the federal government, helping to finance the relatively richer nation's economic recover...
NPR logo China Keeps Piling Up U.S. Dollars

China Keeps Piling Up U.S. Dollars

Foreign wealth, in U.S. billions, parked at the Federal Reserve. (Brown Brothers Harriman) hide caption

toggle caption
(Brown Brothers Harriman)

China's President Hu Jintao and U.S. President Obama are meeting today and tomorrow for another Strategic and Economic Dialogue. In his opening remarks to the press this morning, Obama addressed the trade gap between the two nations, saying, "[A]s Americans save more and Chinese are able to spend more, we can put growth on a more sustainable foundation -- because just as China has benefited from substantial investment and profitable exports, China can also be an enormous market for American goods."

What Obama didn't get into just then is Washington's continued charge that Beijing manipulates its currency, letting the yuan stay weaker than the dollar so Americans will continue to buy Chinese goods.

Much has been made of China's lending to the U.S. -- the poor nation lends the richer one money by buying its U.S. Treasury bonds and agency bonds from Fannie Mae and Freddie Mac. China funded the American consumer boom, and it's using the proceeds to industrialize its own economy. At the current pace, economist Brad Setser estimates that China's holdings of U.S. Treasurys should top $1 trillion in about a year.

After the jump, charts!

China is the largest of the four nations known collectively as the BRICs -- Brazil, Russia, India and China. Together, they represent four of the world's fastest-growing emerging markets. Bloomberg reports that two of the year's biggest initial public offerings, or IPOs, came from China and Brazil.

The BRICs have generally been adding to their foreign reserves, money they keep in other countries' currency. Win Thin of Brown Brothers Harriman's currency desk writes that they park much of this money the same way China does, by buying U.S. Treasurys and agency bonds.

Thin writes that emerging market countries have recently seen their own currencies get stronger, which they don't want at this point in the recession. A strengthening currency tends to shut down exports, since dollars won't buy as much in a place where the local currency is strong. Think of it as a tourist would -- strong dollar, invitingly cheap trip; weak dollar, everything seems expensive.

Foreign reserves help one country influence the value of another's currencies. At heart, this is a matter of supply and demand. If the dollar's in high demand -- if countries want to lard their reserves with it -- then that makes it stronger. Thin says we can expect to see the emerging markets continue to buy U.S. Treasurys (good news for the federal government as it finances the American economic recovery) but also to show interest in currencies besides the dollar. "If you are one of the big reserve managers, diversification of the incoming reserves is probably near the top of your concerns," he writes. He expects the BRICs will keep buying dollars, just fewer of them.

And now, the charts:

Brazil's holdings in U.S. dollars. (Brown Brothers Harriman) hide caption

toggle caption
(Brown Brothers Harriman)

Russia's holdings in U.S. dollars. (Brown Brothers Harriman) hide caption

toggle caption
(Brown Brothers Harriman)

India's holdings in U.S. dollars. (Brown Brothers Harriman) hide caption

toggle caption
(Brown Brothers Harriman)

China's holdings in U.S. dollars. (Brown Brothers Harriman) hide caption

toggle caption
(Brown Brothers Harriman)