China increased its holdings of US government bonds to $1.16 trillion in October, up $7.9 billion from the previous month, once again making the country the largest foreign creditor of the US, according to data released Monday by the US Department of Treasury.
But as the US faces a ballooning deficit, sluggish economic growth and a looming "fiscal cliff", now is a good time for China to be cautious about how much it is spending on US debt.
The US federal government was facing a deficit of $120 billion at the end of October, above the $114 billion predicted by economists.
Meanwhile, the US public debt has tripled over the last decade, hitting $16 trillion by the end of September, according to US treasury data.
What's worse, if the US plunges off the rapidly-approaching "fiscal cliff", the US government will have to initiate a series of tax increases and spending cuts which will drag down the anemic US economy and diminish the country's repayment abilities.
In order to prevent the US economy from imploding under the weight of its mounting fiscal problems, the country will likely pass on its burden to the rest of the world, particularly holders of its debts, in the form of loose monetary policy and runaway borrowing.
The US has raised the federal government's borrowing ceiling 11 times since 2001. In fact, under the Obama administration the limit has been raised by $5.08 trillion, setting a new record in terms of growth.
This has allowed the US government to borrow more to finance its previous debt, but placed the country on a path that could set its debt snowballing over the long run.
If the US fails to pay back its debts, the largest victims will be those who hold the most US treasury securities.
Such an eventuality looks all the more possible now following Standard & Poor's downgrading of the US government's credit rating in August - the first downgrading in the country's history. Under these circumstances, China should start paring down its investment in US debt and diversify its portfolio of foreign reserves.
Based on an interview with Zhang Monan, an economics researcher with China's State Information Center. firstname.lastname@example.org