What influence does China have with US debt?

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Xile F Investor
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What influence does China have with US debt?

Post by Xile F Investor » Wed Oct 09, 2013 11:57 am

I often hear that "China has most of the US debt" and I've seen the tables and charts providing the real details. But this debt is in the form of US Treasury bills, notes, bonds, and TIPS (unless I am wrong). So my question has always been, what can China (or any group/organization with US debt) actually do from a perspective of influence.
Recently, a friend posed the scenario to me that China (or anybody with a large amount of US debt) can sell off the debt at a very low price, thereby devaluing the US dollar.

Is this a true statement? Is there any other way which holders of large amount of US debt can influence/impact the US government?

(I know this can be a borderline political discussion, but I'm asking from a strictly lender influence perspective.)
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Raybo
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Re: What influence does China have with US debt?

Post by Raybo » Wed Oct 09, 2013 12:49 pm

China holds a large hunk of US debt because it is keeping its currency undervalued. That is, the demand for yuan (what the Chinese want to get paid in) exceeds supply (what the Chinese spend for foreign purchases) putting upward pressure on the value of the yuan. In order to dampen the upward pressure and even reverse it, someone has to inject liquidity (more yuan) into the market and be willing to lose value on the deal. The only way to do this, is for the Chinese government to exchange yuan for dollars at the rate it has established.

Put another way, the Chinese government has to buy US debt with its excess dollars (that it has exchanged for yuan at a below market rate) in order to keep the market in its currency from seizing up.

While it is true that the Chinese government could dump its US bond holdings, but what would it do with all those extra dollars?

What's more, what other currency offers enough supply to balance out the trade imbalances in the global market? China might be the only other country with the economic clout to provide a global currency, but I doubt the world is ready to trust the Chinese with such responsibility.
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overst33r
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Re: What influence does China have with US debt?

Post by overst33r » Wed Oct 09, 2013 12:55 pm

Might be useful for this thread

Image

MathWizard
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Re: What influence does China have with US debt?

Post by MathWizard » Wed Oct 09, 2013 1:51 pm

I would not worry too much about it.

Bill Gates could tank MicroSoft stock by selling his shares cheap, but doing so would not be in his best interest,
so he would not do it.

As show in the chart in an earlier post, China is not the largest holder of debt, and not even the larest foreign holder of debt.
China is mentioned in the news only because it is the largest foreign holder of NEW debt. This is because they have had
a growing econony, partly because it is such a poor country overall. (China has a GDP second only to the US, but per-capita
GDP is much worse than the US because the have 4 times as many people.)

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cflannagan
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Re: What influence does China have with US debt?

Post by cflannagan » Wed Oct 09, 2013 2:03 pm

MathWizard wrote:I would not worry too much about it.

Bill Gates could tank MicroSoft stock by selling his shares cheap, but doing so would not be in his best interest,
so he would not do it.

As show in the chart in an earlier post, China is not the largest holder of debt, and not even the larest foreign holder of debt.
China is mentioned in the news only because it is the largest foreign holder of NEW debt. This is because they have had
a growing econony, partly because it is such a poor country overall. (China has a GDP second only to the US, but per-capita
GDP is much worse than the US because the have 4 times as many people.)
Actually I thought China is #1 holder of US debt, with Japan being #2? The chart above seems to suggest that too.

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Steelersfan
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Re: What influence does China have with US debt?

Post by Steelersfan » Wed Oct 09, 2013 2:14 pm

Click through this slide show that shows holders of U.S. debt and how each has grown over the last ten years.

China is the largest foreign holder, but the growth in their holdings has been relatively modest over the last few years, after growing rapidly over the previous seven years.

http://www.fool.com/investing/general/2 ... -debt.aspx

hsv_climber
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Re: What influence does China have with US debt?

Post by hsv_climber » Wed Oct 09, 2013 2:17 pm

Statement is false.
Selling debt cheap won't devalue $.

BTW, I will be more than happy to be on the other side of that trade :-).

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