Curious Partnership in Global Imbalances: China’s Continual Accumulation of US Treasuries

41 Pages Posted: 19 Dec 2010 Last revised: 27 Jan 2011

See all articles by Zhichao Zhang

Zhichao Zhang

Durham University - Durham Business School

Frankie Chau

Durham University Business School

Nan Shi

Durham University - Durham Business School

Date Written: January 25, 2011

Abstract

The combination of American excess consumption and China’s financial extravaganza in accumulating US treasuries has been widely perceived as a major contributor to global imbalances. The current research examines whether this curious partnership can be sustained by concentrating on the Chinese side of the story, i.e. to what extent China may continue to accumulate US treasuries. Evidence from our model simulation and analysis suggests that the inertia effect is the most powerful influence driving the continuation of the stockpiling. As a result of influences from behavioural factors and internal governance elements, China’s American treasury holdings are now so large that the management of this colossal wealth has assumed its own life and dynamics. As a result, at least in the short run there shall be no sudden stop to China’s continual accumulation of American assets.

In the longer run, interest rates and productivity improvement in China and around the world play a lasting role. It is unlikely that changes in US consumer behaviour will be able to fundamentally change China’s hoarding. Neither is there evidence that Renminbi exchange rate changes will impact on China’s willingness to hold its stock of American assets. These findings mean that even if the inertia effect is controlled, transformation of the curious partnership would require China to keep a very low interest rate for a fairly long period, and the US to adopt a substantially high interest rate. Moreover, there would have to be large and sustainable improvements in productivity in both China and the US. We have no reason to expect that these changes will be forthcoming, and so the party will go on. The bizarre partnership between China and America will be a lasting feature of the world economy.

Keywords: Global imbalances, NOEM, US treasury

JEL Classification: F34, F41

Suggested Citation

Zhang, Zhichao and Chau, Frankie and Shi, Nan, Curious Partnership in Global Imbalances: China’s Continual Accumulation of US Treasuries (January 25, 2011). Available at SSRN: https://ssrn.com/abstract=1727343 or http://dx.doi.org/10.2139/ssrn.1727343

Zhichao Zhang

Durham University - Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Frankie Chau

Durham University Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Nan Shi (Contact Author)

Durham University - Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

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