Why China Is Buying U.s. Debt - 1020 Words

Currently, China is one of the world’s most prominent economic powers and recently surpassed the U.S. as the largest economy in the world. China has been one of the primary holders of US debt for decades, primarily in the form of Treasury bonds. If the Chinese government were to begin rapidly selling off U.S. Treasury bond debt, there would likely be substantial global economic and political impacts. However, before I discuss these impacts it is important to understand why China is buying U.S. debt. The overall economic goal of the Chinese government is to keep the value of the yuan at a depreciated value compared to the U.S. dollar and other foreign currencies in order to hold the cost of their exports lower than they can be†¦show more content†¦Having a better understanding of why China is buying U.S. debt now leads us to the economic consequences of the rapid sell-off of U.S. Treasury bonds. While there are varying views on what would happen if China were to ra pidly sell off their holdings of U.S. debt there is a general consensus that this action would ultimately hurt China’s economy more than it would the U.S. economy. Morrison and Labonte state, â€Å"A Chinese attempt to sell a large portion of its dollar holdings could reduce the value of its remaining dollar holdings, and any subsequent negative shocks to the U.S. (and global) economy could dampen U.S. demand for Chinese exports† (2). Economically, China would stand to gain very little from rapidly selling off their U.S. debt holdings since it could possibly damage China’s exports and simultaneously devalue the yuan at the same time. The effect of a rapid sell off on the U.S. economy would not be trivial either. It would likely weaken the U.S. dollar and reduce U.S. demand for Chinese exports. Morrison and Labonte state that, â€Å"All else equal, the reduction in Chinese Treasury holdings would cause the overall foreign demand for U.S. assets to fall, and th is would cause the dollar to depreciate. If the value of the dollar depreciated, the trade deficit would decline, as the price of U.S. exports fell abroad and the price of imports rose in the United States† (16). Overall, the effect of a rapid sell off of U.S. debt by China would