Uncanny Partnership in Global Imbalances: China's Continual Accumulation of US Treasuries (Zhichao Zhang, Frankie Chau and Nan Shi)


The combination of American consumption excess and China’s financial extravaganza in accumulating US treasuries has widely been perceived as a major contributor to the global imbalances. The current research examines whether this uncanny partnership can last long by concentrates on the Chinese side of the story, i.e. to what extent China may continue to accumulate the 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. China’s holdings of the American Treasury are so large that the management of this colossal wealth has
become a process that has its own life and dynamics due to influences of behavioural  factors and the internal governance elements of Chinese funds. 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, the interest rates and productivity improvement in China and around the world play a lasting role. It is unlikely that changes in the US consumer behaviour are able to fundamentally change China’s hoarding. Neither there is evidence that the renminbi exchange rate changes will impact on China’s willingness to hold its stock of American assets. These findings mean that even if controlling the inertia effect, transformation of the uncanny 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 shall have sustainable and large improvements in productivity in both China and the US. We do not have reason to expect the forthcoming of these changes and so the party will go on. The uncanny partnership between China and America will be a lasting feature of the world economy.

Working Paper