- 03 Apr 2021 15:10
#15164580
It means China will hold more US government bonds. China owns US more as US spends more. China can ask anytime for US to announce to be defaulted.
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Istanbuller wrote:
It means China will hold more US government bonds. China owns US more as US spends more. China can ask anytime for US to announce to be defaulted.
Investopedia wrote:China has steadily accumulated U.S. Treasury securities over the last few decades. As of January 2021, the Asian nation owns $1.095 trillion, or about 4%, of the $28 trillion U.S. national debt, which is more than any other foreign country except Japan. As the trade war between the two economies escalates, leaders on both sides seek additional financial arsenal.
Quartz wrote:As tensions escalate between the US and China—over trade, Hong Kong, Taiwan, and even TikTok—officials have expressed concern that Beijing could use its stockpile of US Treasury bonds to destabilize the US economy and pressure Washington into backing down. Regular people are worried too: In a 2018 Pew Research Center survey, America’s debt to China was the top concern among respondents in the US, with 89% saying the problem was “very serious.”
There’s a lot of fear, confusion, and misapprehension about why the US is in debt to China and what what would happen if China were to call it in. Quartz has answers to the most common questions about US debt to China below.
What is US debt and why do other countries own it?
To finance its ever-increasing expenses, the US federal government issues bonds and other debt instruments, known as Treasury securities, which institutions and other countries can buy. So, “US debt” colloquially refers to the value of the outstanding Treasury securities that the federal government has issued to finance its budget.
Holders of US Treasurys receive interest payments twice a year. When the bonds mature, meaning they reach their expiry date, their owner gets paid back in full.
It’s completely normal for countries to buy other countries’ debt. Most governments don’t default on their debts so it’s a low-risk asset to hold. But not all government bonds are born equal: Some are considered safer than others, based on a mix of market perception, how easy they are to buy and sell, and factors like a country’s credit rating.
The fact that China owns a lot of US debt makes sense. It’s the second largest economy in the world. It has a massive trade surplus with Washington, meaning it exports more to the US than it imports from the US. So it can use its reserve of US dollars to buy Treasurys.
China can also use its foreign exchange reserves to influence the value of its currency. So, let’s say China wanted its exports to be cheaper and therefore the yuan to be weaker. It could buy US Treasurys to increase the value of the US dollar. That’s been a major fear of US president Donald Trump’s and earlier this year, Beijing and Washington agreed in phase one of their trade deal (pdf, p. 5-1) to “refrain from competitive devaluations and the targeting of exchange rates for competitive purposes.” But China appears to do this less than the president thinks it does; while the yuan’s relative value may fall, there’s a big difference between currency devaluation and currency manipulation.
How much US debt does China own?
The US national debt has grown during the Covid-19 pandemic and is now roughly $26 trillion. Yes, that is a lot—the most in the world, in nominal terms. Most of it is owned by domestic actors, either consumers, banks, or institutions like the Federal Reserve. Foreign investors—mostly governments or central banks—hold $6.13 trillion of US Treasury bonds. Of that, mainland China purportedly owns $1.1 trillion.
But that number doesn’t tell the full story. First, it doesn’t count investors from Hong Kong, a special administrative region of China, which is the fifth largest holder of US debt. Second, it doesn’t take into account the fact that China buys Treasury securities through custodial accounts in Belgium, the 10th largest holder of US debt, and potentially other countries too.
In 2007, then-presidential candidate Hillary Clinton famously referred to China as America’s “banker.”
What will happen if China calls in US debt?
There’s a couple of things Beijing could do if it wanted to destabilize the US economy, but both would come at a cost.
First, it could sell its Treasurys. According to the Center for Strategic & International Studies (CSIS), “even if China wished to ‘call in’ its loans, the use of credit as a coercive measure is complicated and often heavily constrained.” Since US Treasurys are highly sought after, there would likely be plenty of buyers if Beijing decided to sell. In fact, in 2015, China sold about $180 billion of Treasury bonds and, as Bloomberg reported at the time, “the market barely reacted.” Trump himself said he is “not worried about it at all.”
China could also let its US Treasurys mature and not renew them. But the US constantly issues new bonds before the old ones mature to refinance its debt. And if China decided to sell and there wasn’t enough demand, the Federal Reserve—which owns $2.3 trillion of US debt—or other major central banks like the Bank of Japan could step in to keep interest rates down.
China could sell a lot of its Treasurys suddenly and without warning, and it would take time for the Federal Reserve or foreign investors to step in. This would destabilize the markets but also hurt China, which is a major global exporter.
In April, The Washington Post ran a story suggesting that the Trump administration had discussed “having the United States cancel part of its debt obligations to China.” Officials quickly dismissed the idea. “Full faith & credit of US debt is sacrosanct,” National Economic Council director Larry Kudlow told Politico. “And so is dependable currency as world’s reserve currency. Period. Full stop.”
What is China’s ‘debt trap’ strategy?
Some of the anxiety around China holding a lot of US debt might stem from the country’s reputation for engaging in “debt-trap diplomacy.” As Quartz has reported before:
The name surfaced in the title of a 2017 analysis by an Indian strategic commentator that argued China was offering funding for unsound projects to secure Chinese access to resources or local markets, rather than to help local economies, and as a result “countries are becoming ensnared in a debt trap that leaves them vulnerable to China’s influence.”
This has come up often in recent years in the context of infrastructure projects in developing countries financed through China’s Belt and Road Initiative.
But while the US certainly relies on China to buy a lot of US Treasurys, essentially lending it money, China isn’t giving the US a loan the way a bank would—it’s buying US debt on financial markets. The reality is that both countries’ economies are highly interdependent.
Istanbuller wrote:It means China will hold more US government bonds. China owns US more as US spends more. China can ask anytime for US to announce to be defaulted.
Istanbuller wrote: China can ask anytime for US to announce to be defaulted.
Rancid wrote:
lolwhut?
No you jack ass. Bonds have a schedule, you can't just call in debt.
What you can do is sell off the debt in the open market. However, it would hurt Beijing too.
Also, China has in the past, sold a lot of their bonds in the past, and the market just ate them up. It's not clear if a sell off would really hurt the US all that much.
late wrote:They could hurt us, problem is, it would take down their economy along with ours.
Rancid wrote:Correct. It's a double edge sword.
China was massively negligent by covering up the release of SARS-CoV-2. The toll in human suffering and economic losses are incalculable. The U.S. could seize Chinese holdings of U.S. Treasury securities and convert them to a trust fund to help make up some of the costs. It’s simple justice for the original crime.
Some say China would consider that an act of war. But guess what? The war started ten years ago. China has been conducting unfair trade policies, intellectual property theft and technology theft for years. Only recently has the U.S., led by Trump, stood up to China.
Potemkin wrote:A double edged sword is still a sword.
Unthinking Majority wrote:Pretty sure you can't just cash in your US treasuries anytime you want them. If you (or China) buy a 10-year US treasury bond the US will pay it out to you in 10 years, not 9 or 11, at the agreed upon interest rate at time of sale. This makes things predictable so the US won't default.
Unthinking Majority wrote:Pretty sure you can't just cash in your US treasuries anytime you want them. If you (or China) buy a 10-year US treasury bond the US will pay it out to you in 10 years, not 9 or 11, at the agreed upon interest rate at time of sale. This makes things predictable so the US won't default.
The reason China probably owns all that debt is because they have a lot of money and you have to invest it somewhere. The safest investment in the world is the US economy. You buy a US bond and you know they won't default on it. Not so if you buy a government bond from Zimbabwe.
Crantag wrote:It's my understanding that the theoretical scenario involves China dumping US treasuries on the open market. This would lead to a collapse in the value of these securities and severely undermine the value of the dollar.
Crantag wrote:This would lead to a collapse in the value of these securities and severly undermine the value of the dollar.
"This hypothesis is based on some anti-Americans thought that the USD's value is, very much like dictators' power, is only based on others being forced to let them to. I strongly believe this is not such a case, and frankly I see no valid proof to support this hypothesis.
No currency can be forced into creditability if there are not enough credible entities who genuinely entrusts it.
Rancid has explained the matter better so I am not going to throw mine, which is shit compared to his or (admittedly) yours."
Rancid wrote:It certainly can. The point is, this would hurt China, not just the US. Hence, it's not a useful weapon for China to wield. They have many other better weapons against the US. Like IP theft and buying off countries.
AFAIK wrote:Aircraft carriers and other military equipment also cost money. If China was seeking a more direct confrontation a financial attack might be the cheaper and safer option.
JohnRawls wrote:This is like first shooting yourself in the leg and then shooting yourself in the head for the CCP.
AFAIK wrote:More so than an armed confrontation?
Prior to WWI many insisted that war would be too costly due to all the trade between European states.
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