Foreign Currency Piles Up in China

In recent weeks, Chinese policymakers have signaled a rethinking of investment priorities as they debate what to do with the reserves. Traditionally, China has sunk three-fourths of its reserves into U.S.-dollar-denominated investments, such as U.S. Treasury bills. Some have called for large purchases of oil to create a strategic petroleum reserve. Others have suggested that China will now devote a larger percentage of reserves to other world currencies such as the euro and the yen to reflect its balance of trade.

Some analysts say the size of the reserve gives China a tool to manage trade tensions. "The more China possesses U.S. dollars, the more China can invest in the U.S. and buy U.S. bonds and U.S. products like Boeing aircraft," said Shen Dingli, an American relations expert at Fudan University in Shanghai.

China has consistently harnessed its largesse in this way, timing the announcement of big-ticket purchases from the United States to mollify critics. As Shen acknowledged, however, China's investments have themselves stoked tensions -- not least, last summer when the state-owned oil company Cnooc Ltd. tried and failed to buy Unocal Corp. China and Japan have propped up the value of the dollar and financed U.S. spending by continuing to absorb U.S. debt via the purchase of Treasury bills. Yet these purchases have sown unease, with some in Washington complaining that the United States has relinquished control of its destiny to foreigners.

"The U.S. could fear concerns that as China possesses U.S. debt, that could give China the ability to influence the U.S. financial situation," Shen said.

The huge leap in China's foreign exchange and its trade surplus reflect a basic reordering of global manufacturing. Only a few years ago, laptop computers and televisions, for example, were completed in South Korea, Japan, Taiwan and Malaysia before being loaded onto tankers bound for U.S. ports, to be counted as exports from those countries. Today, much of the final assembly work is completed in Chinese factories, adding to China's trade surplus.

Still, even as the "Made in China" label grows ubiquitous, many of the most valuable pieces inside these products continue to be manufactured and designed elsewhere -- computer chips in Taiwan and Malaysia, liquid-crystal display panels in South Korea, computer software in Japan.

"China's trade surplus is a function of a fundamental imbalance of trade," Green said. "But in fact, these are not China exports: They are really Asian exports."

Special correspondent Eva Woo contributed to this report.