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by dan-robertson 1409 days ago
China holds US debt denominated in dollars, which is different from eg holding Sri Lankan debt denominated in dollars. In the US case, the government can issue more treasuries to cover payments or if things are dire they can just print more dollars. Sri Lanka can’t make new dollars so they need to get them through trade and if they have an imbalance there it can be very hard.

I think it isn’t really very relevant to think about China holding US government debt because it isn’t like they will call up the bailiffs or otherwise be able to exercise control over the US because of that debt. I think it would be basically equivalent to say that China holds US dollars which doesn’t feel particularly concerning to me.
1 comments
scarface74 1409 days ago
Printing more dollars leads to inflation.
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AYBABTME 1408 days ago
It does, but then China can't use their debt holding as a weapon. China is incentivized to keep the dollar stable relative to the yuan, because crashing the dollar would hurt China a lot, and propping up the dollar also would. The whole debt holding is a lot more of a rent-seeking arrangement. Both the debtor and debtee are better off keeping the status quo. Plus China doesn't exactly have the capital to do anything about it. Their own economy is in a debt spiral only kept from crashing by huge government intervention and very tight forex capital controls.
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dan-robertson 1406 days ago
I mostly agree.

I’m not sure I’d call it ‘rent seeking’. China needs forex reserves like a lot of countries and China is big so it’s reserves are big. It’s just that it is generally more convenient but basically equivalent to hold treasuries instead of dollars if you have an enormous amount of money. Doesn’t eg Japan also hold a bunch of treasuries for similar reasons?

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AYBABTME 1406 days ago
I'm no expert on this topic. My perspective is simply that it's against a debt holder's interest to have the debt's underlying asset (currency) devalued. It's much better if the debt holder gets their interest payments (the "rent seeking" part) against an asset that has a stable equivalent monetary value (in term of purchasing power). Especially when we talk of currency, since the interest payment is made... in the currency that would be devalued. Basically, China is long on the USD.
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