China Becomes U.S.`s Top Foreign Creditor

China has passed Japan as the U.S. government`s largest foreign creditor, reflecting the dramatic expansion of Chinese economic influence over the American economy, the Washington Post said yesterday.

Since Beijing owns nearly 10 percent of U.S. public debt, Washington will be increasingly forced to rely on China as it seeks to raise money to cover the cost of the 700 billion dollar bailout. China could also wield greater financial power over the United States.

According to the U.S. Treasury Department, Chinese investment in U.S. bonds rose 43.6 billion dollars to reach 585 billion dollars in September, surpassing Japan’s 573.2 billion dollars.

Three years ago, China’s U.S. debt holdings were less than half of Japan’s, but Beijing has since heavily purchased U.S. Treasury bonds. China is armed with the world’s largest foreign currency reserves of 1.95 trillion dollars.

Since Beijing bought part of the bonds through a third country, its investment in U.S. bonds could reach as high as 800 billion dollars.

With growing dependence on Chinese cash granting Beijing extraordinary sway over the U.S. economy, a sudden cut or surge in buying of the bonds could cause serious side effects. If China stopped buying or, worse, started selling U.S. debt for political reasons, this could also quickly raise interest rates on loans in the United States.

On the other hand, the more China invests in U.S. debt, the harder it becomes for U.S. companies to sell their products overseas because China`s purchase of U.S. bonds makes the dollar stronger, especially against the Chinese yuan. The relatively weak yuan remains one of the biggest obstacles to U.S. penetration of the Chinese market.

"There remains an underlying financial vulnerability if China were to scale back its purchases. It could deliver a shock to the United States," said Brad W. Setser, a fellow at the Council on Foreign Relations.

U.S. unions are already pushing the incoming Obama administration to urge the Chinese to strengthen the yuan, leading to prospects of further strained relations between the two countries.

China is attempting to diversify its foreign currency reserves into euro, yen or gold. If it succeeds, China could be less affected by the weak dollar while increasing its presence in U.S. public debt.

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