Why Finance America’s Debt When It Is Failing?

Foreign central banks, led by China and Russia, hold at least $925 billion in U.S. agency debt, including bonds sold by Freddie and Fannie, according to official U.S. statistics.

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The so-called government-sponsored enterprises are too big, too vital to housing and too important to the Chinese ``for their debt ever not to be honored on time and in full,'' Setser says. Other economists say the very reason behind the rescue plan is to prop up the debt.

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Not only does China hold a lot of these securities, it has, of late, been buying them with gusto. In the 12 months through April, official Chinese additions of U.S. agency debt -- purchases net of sales -- amounted to $67 billion, a 26 percent increase from a year earlier.

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At last count, China owned $502 billion in Treasuries. Including agency debt, its holdings are more than $1 trillion, about a quarter of China's gross domestic product, Setser says.

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Like most of China's economic policies, the nation's approach toward reserve diversification will also be gradualist. With China's reserves reaching $1.8 trillion in June -- a $280 billion increase this year -- Freddie and Fannie, even after losing their yield premium, are assured of the Asian country's reluctant patronage.