Third and final post of a 3-part series. Read part 1 here and part 2 here. As a follow-up to this week’s mailbag question of whether China is buying up US real estate and debt, there is often an underlying fear (perpetuated by politicians running for office) that China has leverage over the US, because they can sell all of their US debt.
If China sells their US debt, they will have a lot of US Dollars (USD). Theoretically, I suppose they could just hold straight USD, but this is unlikely for a variety of reasons so let’s look at their realistic options:
- China could repatriate the cash, by exchanging USD for renminbi (RMB). But this would effectively be selling USD to buy RMB and would cause the USD to depreciate and the RMB to appreciate. If you’re an export-centric economy, why would you want your currency to appreciate against your main trading partner’s?
- China could exchange USD for other currencies, such as Euros (EUR), Yen (JPY), or Pounds (GBP). This would cause the USD to depreciate and those other currencies to appreciate. This is not an ideal outcome either though, since it would also drive the USD lower and the US is China’s largest trading partner. Presumably, the EUR, JPY, and GBP would strengthen and exports to those countries would do better though. However, I don’t see why these countries would buy USD just because China did not want it, especially if they had to increase their own money supply or buy more stuff from the US.
As you can see, China does not have a lot of options. Just as they’re more or less forced to buy US debt, they’re more or less forced to hold it. So the next time a politician starts warning about China owning and selling US debt, call BS!
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