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China is now officially the US government's largest foreign creditor after overtaking Japan, in a development that signals Washington's increasing reliance on Beijing to save its economy. China became the largest foreign holder of US Treasuries, owning 585 billion dollars worth as of September, according to US Treasury Department figures.
But, analysts warned Wednesday, neither country should be celebrating the development, which underlines serious imbalances in the global economy. "China's GDP per capita ranks around 100th in the world but it is actually subsidising the world's richest country," said Zhang Ming, an economist with the Chinese Academy of Social Sciences, a government think-tank in Beijing.
Zhang argued that becoming the largest foreign holder of US Treasuries is only an illustration of how serious the imbalances are in China's overly export-driven economy, rather than an indicator of its strength. "What China is doing involves high risks," he said. "When the debts become massive, there are always more risks for the creditor - that's by no means symmetrical."
China's ever-growing trade surplus, a major source of its massive foreign exchange reserves that is mostly made up of US dollar assets including Treasuries, hit a monthly all-time high of 35.2 billion dollars in October.
Throughout the third quarter, China piled more than 81.1 billion dollars into Treasuries - the safest US assets it could find - while dumping bonds from government-affiliated agencies, such as Fannie Mae and Freddie Mac, said Brad Setser, an economist at the Washington-based Council on Foreign Relations.
That contrasted with the second quarter when China bought only 13 billion dollars of Treasuries while buying 17 billion in agency bonds and 20 billion of corporate bonds. "That is a huge swing - and frankly a destabilising swing," Setser wrote on the council's website.
"The notion that sovereign investors are always and at all times a stabilising force in the market should be put to rest.""China has clearly kept (its exchange rate) stable - and been a big source of demand for Treasuries. But it has been a seller of other assets in a time of stress," he said.
However, China is not likely to suddenly dump US government bonds because now it would only be hurting itself, said Qing Wang, a Hong Kong-based economist for Morgan Stanley. China, with the world's biggest reserves at 1.9 trillion dollars, sees Treasuries as safe and relatively liquid, Wang said. "The US needs help and I think China and Japan want to help. They don't see an alternative to the dollar right now," said Andy Xie, an independent Shanghai-based economist.

Copyright Agence France-Presse, 2008

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