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Are there political reasons why the Chinese government doesn't or is not allowed to buy U.S. stocks? I am asking, because I am wondering why the Chinese government always buy U.S. securities when it could easily buy a SPY ETF and get a better return on its investment than if it were only to buy U.S. bonds.

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    The reason bonds will have a lower rate of return is because they are lower risk. If you buy a US Treasury, you are all but guaranteed to get all of your money back. If you buy anything based on the S&P 500, you're not. (I don't know if this is the reason the Chinese government does this, so this is why I'm not posting this as an answer.) – Joe C Jun 15 '19 at 16:35
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    How do you know they don't buy US stocks? – Time4Tea Jun 15 '19 at 17:45
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Are there political reasons why the Chinese government doesn't or is not allowed to buy U.S. stocks?

Political? Not that I found. China could invest in a number of different assets to get a better return on its investment, they simply choose to not do so.

While there are limitations on Foreign Direct Investment, these limitations don't always apply to stocks.

From the Congressional Research Service report, The Committee on Foreign Investment in the United States (CFIUS), page 23:

According to Treasury Department regulations, investment transactions that are not considered to be covered transactions and, therefore, not subject to a CFIUS review are those that are undertaken “solely for the purpose of investment,” or an investment in which the foreign investor has “no intention of determining or directing the basic business decisions of the issuer.” In addition, investments that are solely for investment purposes are defined as those (1) in which the transaction does not involve owning more than 10% of the voting securities of the firm; or (2) those investments that are undertaken directly by a bank, trust company, insurance company, investment company, pension fund, employee benefit plan, mutual fund, finance company, or brokerage company “in the ordinary course of business for its own account.”

Why China Buys U.S. Debt With Treasury Bonds:

China's Use of USD Reserves

China has approximately US$3.13 trillion of U.S. reserves as of February 2018. Like the U.S., it also exports to other regions like Europe. The Euro forms the second biggest tranche of Chinese forex reserves. China needs to invest such huge stockpiles to earn at least the risk-free rate. With trillions of U.S. dollars, China has found the U.S .treasury securities to offer the safest investment destination for Chinese forex reserves.

Multiple other investment destinations are available. With Euro stockpiles, China can consider investing in European debt. Possibly, even U.S. dollar stockpiles can be invested to obtain comparatively better returns from Euro debt.

However, China acknowledges that stability and safety of investment take priority over everything else. Though the Eurozone has been in existence for around 18 years now, it still remains unstable. It is not even certain whether the Eurozone (and Euro) will continue to exist in the mid-to-long term. An asset swap (U.S. debt to Euro debt) is thus not recommended, especially in cases where the other asset is considered riskier.

Other asset classes like real estate, stocks, and other countries' treasuries are far riskier compared to U.S. debt. Forex reserve money is not spare cash to be gambled away in risky securities for want of higher returns.

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