*EPF505 02/17/2006
Federal Reserve Head Not Concerned over China U.S. Debt Holdings
(However, current account deficit is a concern, Bernanke says) (540)

By Andrzej Zwaniecki
Washington File Staff Writer

Washington -- Federal Reserve Chairman Ben Bernanke played down fears expressed by U.S. lawmakers that China might shake the U.S. economy by selling significant chunks of the U.S. debt it holds.

In his first appearance before the Senate as the head of the U.S. central bank, Bernanke was pressed by Banking Committee members on the question of the U.S. economy's vulnerability to changes in China's U.S.-dollar denominated assets.

But Bernanke said he is not "deeply" concerned about the issue.

"I don't think that the Chinese ownership of U.S. assets is so large as to put our country at risk economically," he said February 16.

At the end of 2005, China, with $820 billion in such assets, was the second-largest holder of U.S. debt after Japan, which held about $10 billion more.

A day earlier, answering similar question from a House of Representatives committee member, Bernanke said China is holding only a small percentage of the overall U.S. debt, which in addition to U.S. government bonds includes government-sponsored enterprise and corporate debt securities.

Bernanke argued that an abrupt sale of U.S. debt securities by the Chinese would be "very much against their own interests.���� He said that they are holding U.S. debt "not because they want to be nice to us" but because they appreciate the debt that is traded in "deep, liquid and safe financial markets."

He said that, although he is not aware of any plans by China significantly to change its holdings of U.S. assets, if it was to sell some U.S. debt securities, the U.S. economy would not suffer.

"I think that realistic changes in China's portfolio are not going to have major impacts on U.S. asset prices or interest rates," he said.

He said the growing U.S. current account deficit is the real concern, not a change in China's investment portfolio.

Bernanke cautioned that foreign investors might at some point decide to stop increasing their U.S. holdings or demand higher earnings on U.S. debt, a development that would lead probably to an "uncomfortable adjustment" in the current account balance and hurt the U.S. economy.

He said, however, that the U.S. current account deficit "can and should come down gradually over a period of time" as a result of higher U.S. national savings in combination with increased domestic demand by major U.S. trading partners (including Japan and Germany), and greater exchange-rate flexibility by Asian countries, particularly China.

The current account, which consists mostly of the trade balance, is part of the balance of payment, the broadest measure of one country's economic transactions with the rest of the world. Another part is the capital and financial account, which records U.S. net sales or purchases of assets, such as stocks, bonds, foreign direct investment and reserves. A large U.S. trade deficit -- $726 billion in 2005 -- is financed by foreign investors buying U.S. assets such as bonds and stock.

For additional information, see Trade and Economics (http://usinfo.state.gov/ei/).

(The Washington File is a product of the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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