"For eight years after the United States resumed running large budget deficits in 2002, China was the largest lender, buying a fifth of the new Treasury securities sold during that span — an expenditure of more than $900 billion. During 2006, China financed more than half the American deficit. When the financial crisis struck hardest, China spent more than $100 billion on Treasuries over the two-month period of September and October 2008."
However, there has been a dramatic shift in the capital flows from China since early last year. The US Treasury Department has estimated that for the 12 months through November, China reduced its holdings of Treasuries by more than $36 billion. In the eight years from 2002-09, the total US Government debt rose by $4.4 trillion to $9.3 trillion, of which China financed a fifth, other foreign countries two-fifth, and Americans the rest.
Further, since the Chinese central bank indulged in massive purchases of dollars to keep the renminbi from appreciating, somebody has been purchasing those Treasuries. These purchases could have been by fund managers from other countries acting at the behest of China or currency traders and investors who arbitraged dollar with other currencies.
In another context, surrounding the Chinese President Hu Jintao's visit to the US, commentators have been comparing the threat posed by Chinese firms to that of Japanese firms in the eighties. Unlike the case with Japan, American firms have much greater exposure in China for a variety of factors. This they claim may make them more vulnerable to Chinese manipulation. They point to the US quarterly current account deficit with the US of $89.2 bn, which is four-and-half times more than that of Japan.
Japan sharply limited direct investment by foreign companies, while China welcomed it with the result that all major US companies have substantial investments there. Like Japan, the Chinese government too has insisted on technology transfers. They demand technology transfers and setting up of manufacturing plants in joint ventures for preferred access to the domestic market.
The Chinese government has been more aggressive with its industrial policy, outlining a lengthy list of industries where it has long-term ambitions - commercial aircraft, telecommunications equipment, high-speed trains, clean-energy goods like solar panels and wind turbines, and even automobiles. Finally, the Chinese domestic market is much larger than anything Japan could offer.
Update 1 (8/5/2011)
Laura Tyson argues that the demand for tough action on renminbi revaluation by American policy makers fails to recognize that the renminbi has already appreciated significantly relative to the dollar, exaggerates the benefits of a stronger renminbi for the United States and overlooks the benefits of a stronger renminbi for China itself.
She points to calculations by The Economist, since 2005, when China adopted its managed-band system, the renminbi has appreciated about 24 percent in nominal terms and about 50 percent in real terms relative to the dollar. An appreciation of the renminbi vis à vis the dollar would help China combat imported inflation, especially for oil and commodities whose world prices are denominated in dollars.