China’s Dollar Holdings Cited

China’s appetite for dollar deposits appears to have played a significant role in helping the United States plug its trade gap over the last three years, according to a report by the Bank for International Settlements.

The Swiss-based BIS, a forum for the world’s central banks, calculated in its quarterly report that rising dollar deposits, together with declining dollar loans, generated a foreign currency surplus of $75 billion in mainland Chinese banks in the 1999-2001 period.

It said this sum, which beats the $67-billion rise in China’s official foreign exchange reserves over the same period, has flowed in large part into U.S. debt markets.

“Taken together, the increase in foreign currency liquidity in China’s banking system and higher foreign exchange reserves suggest that Chinese bank managers and official reserves managers needed to find uses for over $140 billion during this period,” the report says.

“The Chinese banking system’s dollar surpluses have joined increases in official reserves in flowing into BIS reporting banks and U.S. debt markets.”

The level of overseas demand for U.S. assets is closely monitored by currency analysts, given signs that foreigners’ voracious appetite for U.S. assets has begun to fade.

The U.S. needs to attract capital inflows of $1 billion every day to offset its current account deficit and keep its currency stable.