The China Investment Challenge

When it comes to Chinese foreign direct investment, the US and Europe have legitimate reasons to worry about national-security issues. But, if US and EU officials cannot figure out the proper mix between economic engagement and protecting national security, Chinese investment capital will go elsewhere, leaving the US and the EU weaker, not stronger.

NEW YORK – China now sits atop $2.4 trillion in foreign-exchange reserves, the largest stockpile of any country in the world (Japan stands in second place with $1 trillion). But this bounty comes with one big headache: where should Chinese Communist Party officials park all that money?

International bankers estimate that roughly two-thirds of Chinese reserves have been invested in dollar assets. In other words, China owns a huge chunk of America’s ballooning debt. Chinese reserves invested in these conservative financial instruments are relatively safe, but they yield little return. They have, however, helped support China’s economy by allowing Americans to run up consumer debt by buying more Chinese goods than they rightfully need.

A moment of truth is looming for both sides of this co-dependent, and ultimately dysfunctional, economic relationship. First, there are limits to how many trillions of dollars China can, and should, put into US Treasury bills. After all, should the dollar depreciate, China does not want to have too many eggs in the US basket. Investors should diversify their risk, and so must China.

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