China’s Holding of US Treasuries: Author Say’s Nothing to Fear

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China’s Holding of US Treasuries.

By: Michael Guess

Every so often you read or hear something like this: China is holding of billions of dollars in US Treasury bonds, and that puts us at risk as it could give them leverage over us via our currency.

Rubbish. China has the problem, not us. Let me explain.

This is how foreign exchange is supposed to work:
– A foreign company sells a product to a US company.
– The foreign company is paid in dollars.
– The foreign company takes the dollars to their Central Bank and exchanges them for their own currency.
– The Central Bank then goes on the open market, sells the dollars and buys their own currency.

But the Chinese Central Bank has decided not to sell the dollars. Instead they are just sitting on them. Why?

The answer has nothing to do with Chinese foreign policy and everything to do with Chinese domestic policy.

Selling a lot of something lowers the price, and buying a lot of something raises the price. The action of selling US dollars and buying Chinese yuan will affect the exchange rate between the two currencies. The Chinese currency would become more expensive compared to the US currency. In the case of the dollars and yuan the change in the exchange rate could be significant.

China is a dictatorship. The number one fear of the Chinese government is domestic unrest. A recent issue of the Economist magazine reported that the Chinese government now allocates more money to domestic security than to the military. A large increase in the value of the yuan will negatively affect the Chinese export industry. Millions of people would lose work. The very survival of the Party could be at risk.

Given that risk, what should the Chinese government do with all the dollars they are accumulating? Sell them and risk massive discontent, or just keep them? Clearly they have decided to hold the dollars, out of fear of the consequences.

Like I said, they have the problem, not us.

So…if in the future President Obama does something to offend China (like scheduling a lunch meeting with the Dalai Lama or something), and China responds by contacting Hillary Clinton and huffs and puffs that if that happens they will “use the dollar weapon”, she should smile sweetly at them and say: “Go ahead, make my day”.

Now, if you’re talking to somebody and they start going on about the Chinese owning us or something like that, explain the above to them. They will be impressed.

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2 COMMENTS

  1. 你厌恶我。为什么你的父母没有放弃你是我的神秘面纱。我希望你不要生育。 你厌恶我。为什么你的父母没有放弃你是我的神秘面纱。我希望你不要生育。

    A Republican President, Richard Nixon, launched our current relationship with The Red Chinese.

  2. This editorial misses a few key points.

    1. There are more than two currencies in the world, the Chinese could easily dump their dollars in exchange for other foreign currencies like the Euro.

    2. The Chinese have large reserves of actual foreign currencies and are buying up large amounts of our Treasury securities. If the Chinese would like, they can stop buying our Treasuries and just sit on the cash, or use our dollars to buy up various other investment products available on the global market.

    3. Either of those actions could have severe consequences for the US.

    4. The current economic conditions give the US and China a MAD like threat to hang over the head of the other. No one knows just what would happen if either side pulls the trigger.

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