Beijing vows not to use U.S. debt for political gain

A top Chinese official said Tuesday that Beijing will not use its vast holdings of U.S. government debt for political gain, just a few days after a forecast projected that the U.S. national debt is on course to triple to $20 trillion over the next decade.

China holds the world’s largest cache of foreign exchange reserves, which soared more than $450 billion last year to reach $2.4 trillion at year’s end. Concerns about Beijing’s plans for its holdings have peaked in recent weeks after Chinese military officials suggested using that debt to pressure the United States in other policy areas.

But a top Chinese state financial officer Tuesday rejected that approach.

“The U.S. Treasury market is the world’s largest government bond market,” said Yi Gang, the head of the State Administration of Foreign Exchange. “Our foreign exchange reserves are huge, so you can imagine that the U.S. Treasury market is important to us,” he said during the annual session of China’s parliament.

Mr. Yi emphasized his hope that China’s investment in U.S. Treasury securities would not become a political football.

“This is purely market-driven investment behavior. I would hope not to see this matter politicized,” he said in response to a question about American concerns that Beijing’s holdings of U.S. debt posed a political threat. “China is a responsible investor, and we fully believe such investments can be mutually beneficial.”

Mr. Yi expressed those views one month after a senior military official in the People’s Liberation Army recommended using economic measures to retaliate against a $6 billion arms package that the United States agreed to sell to Taiwan.

“Our retaliation should not be restricted to merely military matters,” Maj. Gen. Luo Yuan said last month. “For example, we could sanction them using economic means, such as dumping some U.S. government bonds.”

Last month, the Treasury Department revealed that China’s official holdings of U.S. Treasury debt declined from more than $800 billion in July to $755 billion in December. As a result, Japan replaced China as America’s No. 1 foreign creditor.

Unofficially, however, China is thought to hold hundreds of billions of dollars in additional Treasury debt in offshore accounts located in Britain, the Caribbean and elsewhere. China also holds more than $400 billion in debt issued by mortgage financing giants Fannie Mae and Freddie Mac, whose obligations are effectively guaranteed by American taxpayers.

Mr. Yi’s delivered his verbal vote of confidence in Treasury debt a few days after the Congressional Budget Office issued its preliminary analysis of President Obama’s budget blueprint through 2020. Publicly held debt is scheduled to soar by nearly $13 trillion during the 2010-20 budget period, the CBO said.

CBO expects U.S. publicly held debt to surpass $20 trillion at the end of fiscal 2020, reaching 90 percent of annual economic output. That is up from 40 percent at the end of fiscal 2008.

To finance this soaring debt burden, the U.S. government will have to depend on foreign investors, especially China, whose trade surpluses are likely to remain massive in the next decade.

Foreign investors now hold $3.5 trillion of publicly held U.S. debt, or nearly 50 percent of the total. That’s up from $14 billion in 1970, or less than 5 percent.