Originally posted on China Journal:

With the continued growth in China’s official foreign-exchange reserves now having pushed them past the $2 trillion mark, the debate over what to do with them shows no sign of dying down.

There’s an increasingly strong sentiment in China that these funds should be used to benefit the nation, rather than being lent to the U.S. and other rich countries. Premier Wen Jiabao said earlier this week that China should “combine the use of foreign exchange reserves with the ‘going out’ strategy of enterprises” (in Chinese here). That echoed earlier government statements — a deputy administrator at the State Administration of Foreign Exchange, for example, also raised the idea in February of using the reserves to support Chinese companies’ growing outward investments.

Despite such high-level official backing for this idea, there’s no evidence that China has actually done anything about it. China Investment Corp., the nation’s sovereign wealth fund, does own shares in several foreign companies. But it has been careful to present itself as a financial investor uninterested in operational control and its deals don’t seem to be coordinated with those of ordinary Chinese enterprises.

The sheer size of the reserves does give a daunting impression of China’s financial firepower. As Eswar Prasad and Isaac Sorkin note in a new piece for the Brookings Institution, $2 trillion is equivalent to:

all the land and property in New York City, Los Angeles and Boston

73% of the market capitalization of the Dow Jones Industrial Average at the end of June

25% percent of the market capitalization of the S&P 500 at the end of June

But the sheer size of the reserves is increasingly a handicap for China, which would find it impossible in practice to actually buy any of the above assets. It is restricted to markets large enough to absorb the enormous amount of funds it has to work with. “China has begun to diversify into gold and other commodities, and has also agreed to buy some SDR-denominated IMF bonds. But the amounts involved pale in comparison to either the stock or even the monthly pace of reserve accumulation,” Prasad and Sorkin write.

They think there’s no real likelihood that China is going to be able to do anything different with the reserves than what it is already doing: parking a very large percentage of them in U.S. government debt. And the latest figures from the U.S. Treasury show that China continues to buy US Treasury bills and bonds on a massive scale.