Is the US Becoming A Wholly-Owned Subsidiary Of China?

Despite recent government reports that China's holdings of U.S. Treasury debt declined during the second half of last year, the Asian economic giant almost certainly owns far more Treasury securities than official statistics indicate.

After peaking at $801.5 billion, China's holdings of U.S. Treasury securities declined to $755.4 billion at the year's end, dropping the communist power into the position of second-largest holder of Treasury debt after Japan's $768.8 billion, official government data reveal.

But these numbers don't tell the whole story.

"The U.S. Treasury data almost certainly understate Chinese holdings of our government debt because [the U.S. figures] do not reveal the ultimate country of ownership when [debt] instruments are held through an intermediary in another jurisdiction," Simon Johnson, an economics professor at the Massachusetts Institute of Technology, told the U.S.-China Economic and Security Review Commission, a bipartisan forum established by Congress in 2000 to monitor the security implications of the U.S. economic relationship with China.

Under the widely held assumption that 70 percent of China's $2.4 trillion in foreign exchange reserves is invested in dollar-denominated bonds, Eswar Prasad, an economist at Cornell University told the commission that China probably holds about $1.7 trillion in U.S. government debt.

That would include the more than $400 billion in debt issued by U.S. government agencies, such as Fannie Mae and Freddie Mac, whose obligations are liabilities of the U.S. government, Mr. Prasad said.

Derek Scissors, a China scholar at the Heritage Foundation, described as "unusable" the official U.S. government data on foreign holdings of Treasury debt.

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