China Will Keep Buying US Debt Due To Few Other Alternatives

China says it will keep buying US debt. “The U.S. Treasury creates the world’s largest government bond market. “Our foreign exchange reserves are huge, so you can imagine that the U.S. Treasury market is an important one to us,” Yi Gang, head of the State Administration of Foreign Exchange (SAFE), told a news conference., according to Reuters.

Last year, China warned the US that the American debt would become less attractive as national deficits make Treasuries more risky.

But, truth be told, US Treasuries are the only game in town as China’s $2 trillion horde of currency reserves grows. The American government is in the process of raising hundreds of billions to dollars to support stimulus packages at a time when the recession has ravaged IRS receipts. The Chinese have nowhere else to turn to get substantial amounts of interest-bearing investments.

Some analysts and government officials have argued that China will use its ownership of US debt as leverage in trade negotiations and perhaps military and foreign policy issues. The People’s Republic was recently very upset that the American government sold arms to Taiwan. The other side of the argument about China’s Treasury holdings is that if the world most populous nation does anything to damage the value of US paper, it is only harming the value of its own holdings.

In reality, China and America needs one another in the debt market whether mainland economic policy makers like it or not. China’s support of US GDP growth through providing capital to support the American stimulus should help the American consumer be a spender. That, in turn, supports China’s export activity.

The Chinese and Americans both hope that a rapid growth in US GDP will eventually wipe out deficits and begin to bring down the national debt. Forecasts from the White House and CBO do not support that wish. U.S. debt is expected to rise by nearly $10 trillion between now and 2020. That leaves the issue of what China will own in a decade if its continues to buy US Treasuries.

A German official recently suggested that Greece sell some of its islands to cover its debt problems. China may end up with ownership of the Hawaiian Islands.

Douglas A. McIntyre