Abstract

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China’s economic rise is one of the factors creating strains in the international financial order. China is already the largest trading nation and the second largest economy. It is likely to emerge in the next few years as the world’s largest net creditor. It is already #2 behind Japan. Until recently, China’s main foreign asset has been central bank reserves, mostly invested in U.S. Treasury bonds and similar instruments. In the last couple of years, however, this pattern has started to change. China’s reserves peaked at about $4 trillion at the end of 2014. Since then the People’s Bank of China has sold some reserves, but the country as a whole is still accumulating net foreign assets as evidenced by the large current account surplus. What is new is that the overseas asset purchases are coming from the private sector and state enterprises, not from the official sector. As investment opportunities diminish in China owing to excess capacity and declining profitability, this commercial outflow of capital from China is likely to continue at a high level.