China's economic growth has slowed over the years. As China's exports decline, it is less able to invest in U. China also is liberalizing its control of the yuan, also called the renminbi. It has opened yuan trading centers in London and Frankfurt. China is also responding to accusations of manipulation. Most countries want their currency values to fall so they can win global currency wars. Countries with lower currency values export more since their products cost less when sold in foreign countries.
The Chinese government uses U. It receives these dollars from Chinese companies that receive them as payments for their exports. It allows the U. Treasury to borrow more at low rates. Congress can then increase the federal spending that spurs U.
Owning U. Treasury notes helps China's economy grow. Demand for dollar-denominated bonds raises the dollar value compared to that of the yuan. That makes Chinese exports cheaper than American-made goods, increasing sales.
China's position as the largest foreign holder of U. It is responsible for lower interest rates and cheap consumer goods. If it called in its debt, U. On the other hand, if China called in its debt, the demand for the dollar could plummet. This dollar collapse could disrupt international markets even more than the financial crisis. China's economy would suffer along with everyone else's.
If China ever did call in its debt, it slowly would begin selling off its Treasury holdings. Even at a slow pace, dollar demand would drop. At some price point, U. Department of the Treasury and the Federal Reserve. Much of the rest of the debt is owned by individual investors, corporations, and other public entities. This includes everyone from retirees who purchase individual U.
Treasurys to the Chinese government. Japan and China own about 5. There are two main economic reasons Chinese lenders bought up so many U. The first and most important is that China wants its own currency, the yuan, pegged to the dollar.
A dollar-pegged yuan helps keep down the cost of Chinese exports, which the Chinese government believes makes it stronger in international markets. This also reduces the purchasing power of Chinese earners. Dollar-pegging adds stability to the yuan, since the dollar is still seen as one of the safest currencies in the world. This is the second reason the Chinese want Treasurys; they are essentially redeemable in dollars. China drew some headlines in and for buying up a lot of gold to store in its bank vaults, but the real safety net for the yuan is the worldwide belief in the dollar.
It's politically popular to say that the Chinese "own the United States" because they are such a huge creditor. The reality is very different than the rhetoric. If the Chinese suddenly decided to call in all of the federal government's obligations which isn't possible, given the maturities of debt securities , it is very likely that others would step in to service the market. This includes the Federal Reserve, which already owns nearly three times as much debt as China.
Second, the Chinese rely on American markets to buy Chinese-produced goods. Artificially suppressing the yuan has made it difficult for a growing Chinese middle class , so exports are needed to keep businesses running. Consider what the current arrangement means: The Chinese buy up dollar bills in the form of Treasuries.
This helps inflate the value of the dollar. In return, American consumers get cheap Chinese products and incoming investment capital. The average American is made better off by foreigners providing cheap services and only demanding pieces of paper in return. Department of the Treasury. Accessed Mar. Bureau of the Fiscal Service. World Bank. Congressional Research Service. It is not even certain whether the Eurozone and Euro will continue to exist in the mid-to-long term.
An asset swap U. Other asset classes like real estate, stocks, and other countries' treasuries are far riskier compared to U. Forex reserve money is not spare cash to be gambled away in risky securities for want of higher returns. Another option for China is to use the dollars elsewhere. For example, the dollars can be used to pay Middle East countries for oil supplies. However, those countries too will need to invest the dollars they receive.
Effectively, owing to the acceptance of the dollar as the international trade currency, any dollar supply eventually resides in the forex reserve of a nation, or in the safest investment—U. Treasury securities. One more reason for China to continuously buy U. Treasurys is the gigantic size of the U. Buying U. Treasurys enhances China's money supply and creditworthiness. Selling or swapping such Treasurys would reverse these advantages.
Hence, as long as China continues to have an export-driven economy with a huge trade surplus with the U. Chinese loans to the U. China gets a huge market for its products, and the U. Beyond their well-known political rivalry, both nations willingly or unwillingly are locked in a state of inter-dependency from which both benefit, and which is likely to continue. It was replaced by the British pound sterling.
Treasurys that are considered virtually the safest. Apart from the long history of the use of gold by multiple nations, history also provides instances where many countries had huge reserves of pounds sterling GBP in the post-World-War-II era. These countries did not intend to spend their GBP reserves or to invest in the U. When those reserves were sold off, however, the U. Its economy deteriorated due to the excess supply of its currency, leading to high-interest rates.
Due to those restraints and the absence of a flexible exchange rate system, the selling off of the GBP reserves by other countries caused severe economic consequences for the U. Since the U. The offloaded U. The repercussions for China of such an offloading would be worse.
An excess supply of U. It would increase the cost of Chinese products, making them lose their competitive price advantage. China may not be willing to do that, as it makes little economic sense. If China or any other nation having a trade surplus with the U. Treasurys or even starts dumping its U. The ongoing worries about China's increased holding of U. Treasurys or the fear of Beijing dumping them are uncalled for.
Even if such a thing were to happen, the dollars and debt securities would not vanish. They would reach other vaults. Although this ongoing activity has led to China becoming a creditor to the U. Considering the consequences that China would suffer from selling off its U. Even if China were to proceed with the selling of these reserves, the U. It can also take other measures like Quantitative Easing QE. Although printing dollars would reduce the value of its currency, thereby increasing inflation, it would actually work in favor of U.
Real repayment value will fall proportionately to the inflation—something good for the debtor U. Although the U. Effectively, the U. China, on the other hand, needs to be concerned about loaning money to a nation that also has the limitless authority to print it in any amount.
High inflation in the U. Willingly or unwillingly, China will have to continue to purchase U. Geopolitical realities and economic dependencies often lead to interesting situations in the global arena. China's continuous purchase of U. It continues to raise concerns about the U. The reality, however, is not as bleak as it may seem, for this type of economic arrangement is actually a win-win for both nations.
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