The Effect Analysis Of The China Investment To US T-securities By Using Foreign Exchange Reserves

In 2006, China overtook Japan to become the world’s largest holder of foreign exchange reserves. Among these, the dollar asset is the main form of China’s holdings. However, with the outbreaking and contagion of the subprime crisis, western developed economies, including the United States, had entered a period of economic hibernation. In order to alleviating the pressure on employment and stimulating economic growth, the United States government released quantitative easing(QE) monetary policy. The direct consequence of this policy was to lower the exchange price of the dollar in the past two years. Especially, while RMB accelerated the appreciation speed, dollar’s depreciation caused the lossing of China’s foreign exchange reserves significantly. Under this background, China purchased US T-securities several times in the past few years, and gradually became America’s largest creditor nation. This undoubtedly brings us a great deal of distress-why did China increase US T-securities holdings while US dollar was expected depreciation? Would this investing behavior bring more negative effects on China’s economy? These questions are being the topics which the academic circles are discussing and paying attention to.Firstly, the article systematically combined the foreign exchange reserves management theory system and reserves investment theories, and then found that the existing theory system showing the research path was step by step. On this basis, though showing and inducting the scale of China’s foreign exchange reserves and US T-securities holdings, and combining existing study methods, paper proposed an analytical framework based on the effects of government bond’s issuance and circulation. That is, the holding of US Treasuries will bring to China the "sovereign wealth transfer effect" and the "inflationary effect". Furthermore, the article used the seigniorage concept and consumer utility maximization framework for the more detailed discussing and empirical researching on the existence of these two effects and possible economic paths. The result showed that, duing to the existence of the government bond seigniorage, in the past six years, China had delivered more than 60 billions US dollars sovereign wealth to US government. At the same time, holding US T-securitie could bring upward pressure on inflation to China in theory. However, due to China’s central bank concentratly held foreign exchange reserves, the potential inflationary pressures eventually be passed on the influence of the funds outstanding for foreign exchange to the inflation.Finally, basing on the economic effects of China’s US T-securities holding and influence of foreign exchange reserves to China’s economy, paper suggested that China should control the size of foreign exchange reserves legitimately, reduce the proportion rate of US T-securities, and accelerate the process of RMB internationalization moderately to promote sovereign wealth increasing. And then, the article built a foreign exchange reserves investing management system withby the management levels and assessment indicators.