Challenges investors face in US, EU
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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.
But with so much capital, the options are limited. Until the euro weakened recently, Chinese bankers had been buying more euro-denominated assets, no doubt recognizing that, despite the frailty of the European Union's (UN) economy, Chinese exporters also need European consumers to keep buying their goods.
But the reality is that neither the euro nor the yen is capable of soaking up China's growing foreign exchange reserves.
It is hardly surprising then that Chinese officials have begun seeking more diverse and profitable investment possibilities across the world. We are far less acquainted with other kinds of Chinese investments, including outright acquisitions of foreign companies.
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