China and US Treasuries

As I write this in Q2 2018, non-agency US federal debt is estimated at $21,120,516,214,632.52, or about $64,727 per person in the US.

What fraction of that $21.1 trillion debt do you suppose is held by the Chinese? Go ahead, guess, I’ll wait.

No idea? Does this from a recent Reuters piece that ran in the NY Times help? (Hint: not really.)

China held around [redacted] trillion of Treasuries as of the end of January, making it the largest of America’s foreign creditors and the No. 2 overall owner of U.S. government bonds after the Federal Reserve. Any move by China to chop its Treasury portfolio could inflict significant harm on U.S. finances and global investors, driving bond yields higher and making it more costly to finance the federal government.

Ready to guess now? Answer below.

China holds about $1.17 trillion in US debt – about five percent of the total, just a bit ahead of Japan. Is that enough to create a run on US Treasuries? I’m a bit dubious, but maybe if China sold them off in a hurry. But it’s certainly not enough to push down the price without suffering fairly grievous losses:

Brad Setser, senior fellow for international economics at the Council on Foreign Relations in New York, said China can sell Treasuries and buy lower-yielding European or Japanese debt.

But the effect would likely be to strengthen the yuan against the dollar, weakening the relative desirability of its exports, analysts said. The sale could also tank the value of the Treasuries China retains, with nothing to show for the aggression.

Find something else to worry about.

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One Response to China and US Treasuries

  1. LHOHQ says:

    These stories are sensational fearmongering.

    China holds a lot of Treasury debt because they’re our 3rd largest trade partner after Canada and Mexico. For China to buy US goods, they need dollars first. The best way to get dollars is to buy Treasury debt because it’s stable and pays interest. China would be stupid not to buy Treasuries, and we would only be limiting our exports if we limited the issuance of debt.

    The Federal Reserve, however, after the recent financial crisis has surpassed China as a holder of Treasury debt. Which is more troubling than the debt China holds, since we get goods from China but nothing from the Fed (which, actually, charges us for this service).

    https://fred.stlouisfed.org/series/FDHBFRBN

    This so-called “quantitative easing” was the equivalent of printing money like mad — except it was implemented by the Fed rather than the Treasury that actually controls the coin. The reason this didn’t cause massive inflation is that lending rules were changed.

    The real risk with this financial instrument is that, as the lynchpin of our economy, it is funded by oil. OPEC prices oil exclusively in dollars since Nixon exited Bretton Woods in 1973. If OPEC abandons this practice, Planet Earth overall no longer needs Treasuries to buy cheap oil. That’s when things go south, and China may just be planning for this, rather than trying to sabotage us.

    FYI.

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