The Analysis On The Economic And Financial Impact By China’s Higher Holdings Of U.S. Treasury Debt

Our official foreign exchange reserve assets mainly rely on U.S. dollar assets, inwhich U.S. Treasury debt has been the main investment direction. The huge amount of U.S.Treasury bonds’ holding is the inevitable result of the development of Sino-US economicmodel, also an objective requirement as to economic relations between China and theUnited States, internal requirement of the international capital movement at the moment,and our strategic needs to a peaceful rise. In the meantime, the Sino-US economy has beenhighly interdependent, more than about30%of China’s foreign exchange reserves madeinvestment in U.S. Treasury debts, with this single investment structure, the higherholdings of U.S. Treasury debt faced great risk exposure, and its impact on our financialstability cannot be ignored that we must attach great importance.With higher holdings of U.S. treasury debt for a cut point, this paper from theperspective of finance uses a combination of qualitative and quantitative methods, toanalyze the two conduction path as to quantity and price. From the angle of quantity:holdings of U.S. Treasury debt→money supply→Inflation, which mainly analyze theconduction to China’s inflation by higher holdings of U.S. Treasury debt; From the angle ofprice: holdings of U.S. Treasury debt→market rates→rate of RMB to USD, which mainlyanalyze the conduction to China’s RMB exchange rate by higher holdings of U.S. Treasurydebt, then pointed out the inflation risk and the RMB exchange rate risk due to higherholdings of U.S. Treasury debt. VAR models have further confirmed this inflation andChina’s RMB exchange rate conduction by holdings of U.S. Treasury. At the end, thispaper puts forward some countermeasures from four different angles, to minimum reducethe risks arised by higher holdings of U.S. Treasury debt.