Op-Ed Contributors

Challenges investors face in US, EU

By Orville Schell (China Daily)
Updated: 2010-09-01 07:51

China now sits atop $2.4 trillion in foreign exchange reserves, the largest held by a country (Japan is second with $1 trillion). But this bounty comes with one big headache: where should Chinese officials park all that money?

International bankers estimate that roughly two-thirds of the 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.

The moment of truth is looming over 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.