China emerges top lender to US government; weighs alternatives

China, the top buyer of US government bonds, is looking at alternatives for parking its surplus cash and has warned that it would not keep lending money to the US economy indefinitely.

The warning was published in China's English language newspaper 'China Daily' after US treasury reported a steep rise in Chinese holding of US treasury bonds. 

Chinese holding of US treasury bonds rose to $652.9 billion as of end-October, up 11.2 per cent from $587 billion in September, when China became the largest creditor to the US ahead of Japan, the treasury data released on Tuesday showed.

Japan was in second place, with total holdings of $585.5 billion as of end-October.

''China's increased purchase of US treasury securities should not be interpreted as an endorsement of the assumption that the US can borrow its way out of the current financial crisis," an editorial in the China Daily said.

The paper, however, said if nations stop channeling money to the US economy, the consequences would be serious, for it may undermine the US government's efforts to cut interest rates and boost lending.

Instead, a blocking of fund flows to the US economy would raise real interest rates there despite the Fed's lowering of interest rates.

"Interest rates in the US would rise to undermine that government's efforts to bail out distressed financial institutions and companies," it said.

But, without any better alternatives and amidst growing skepticism that such purchases may incur huge losses later, China will have to continue investing in US treasuries, the daily said.

"With few options to invest its increasing reserves safely and profitably, China may thus have to buy more US treasury securities in spite of growing domestic skepticism that such purchases may incur huge losses later," it said.

"The current strong foreign appetite should not be taken by the US government as solid proof of the long-term value of its Treasury bonds," it said.

The daily said US will have to undertake painful but critical reforms to revive its economy before such demand peaks.

China's central bank Governor Zhou Xiaochuan, meanwhile, said China's own interest rates may be revised further downwards again this month after exports declined, inflation slowed and property investment cooled.

China's economy, the world's fourth largest, may be heading for its slowest growth in two decades as the global financial crisis cuts demand.