See wing-ching's view on China's investment in US treasury

See's view follows what Brad Sester said, the major risk in US investment is the exchange rate risk (i.e. potential USD depreciation in future). To mitigate such risk, China should lend money in RMB-denomiated bonds (to the US)

The implications are

• the interest rate is determined by RMB rate
• potential issue with China's forex control and also RMB market rate (increased demand by the time the RMB bonds are due -- but this could work in China's advantage, sort of, as it receives the appreciated notes, though the 'apparent downside' is the impact on export, but you can't have it both ways)
• this may help release the political pressure from US on the rate of RMB appreciation (vs USD) in future, as by then RMB appreciation will mean that the US government would have to pay more (the US government can always hedge the risk through forward contracts with the i-banks but there is small cost associated with such hedging. In fact, China can also do such hedging if it keeps on buying US Treasury bonds)
• if, by the time China's holding in RMB denomiated bonds reaches the size of USD (or EUR/etc) denominated bonds, the net impact of RMB appreciation (or depreciation for that matter) on China's reserve holding would be neutral. i.e. China does not need to hedge!