By Buyinza L.Adam
There are two main economic reasons Chinese lenders bought up so many U.S. Treasury securities.
The first and most important is that China wants its currency,the yuan, pegged to the dollar and it has always been so for now 70 years.
This has been common practice for many countries ever since the Bretton Woods Conference in 1944.
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.
Effects Of Dollar-Pegging:
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 US Treasury’s; they are essentially redeemable in dollars.
What Happens If China Withdrawals Its Money From US Bonds?
If China called in all of its U.S. holdings, the U.S. dollar would depreciate, whereas the yuan would appreciate, making Chinese goods more expensive and the world will run away from Chinese goods.Chinese export will reduce by 60%,Chinese economy will suffer hence the biggest blow to Chinese economy.
If the Chinese suddenly decided to call in all of the federal government’s obligations in usa (which isn’t possible, given the maturities of debt securities), other nations interested in usa safe bonds would likely step in to service the market. This includes the Federal Reserve of USA which already owns six times as much debt as China hold in usa..
China 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 in China to boost Chinese economy.
Consider what the current arrangement means. The Chinese buy up dollar bills in the form of Treasury’s. 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 inexpensive services and only demanding pieces of paper in return.
Though China owns a large amount of U.S. debt, it isn’t the United States’s largest creditor. The greatest amount of U.S. debt is owned by the U.S. Government, while the largest foreign creditor is Japan holding 1.1 trillion USD while China is holding 860 billions USD out of the usa bond debt of 7.7 trillion USD.
China owns around 2.6% of U.S. debt out if 7.7 trillion USD which it buys because the Chinese yuan is pegged to the dollar. It would be impossible for China to call in all its U.S. debt at once, given the different maturity dates of the U.S. securities that China owns.
Buyinza Adam Luzindana
Team Leader
Public Opinions International
We: www.publicopinions.net
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