There is no American politician, regardless of his affiliation and orientation, who does not express his grave concern about the huge debts that his government owes to Chinese lenders. At the beginning of this year, the American debt to China was estimated at 1.1 trillion US dollars, and by July 2020 it reached 1.07 trillion dollars.
Perhaps the question that arises: How can the second largest economy in the world be a lender to the first economy in the world, why does China lend to the United States in light of the trade war between them, and how China has become one of the largest lenders to the United States of America? However, the question that most worries many Americans is: What if China asked the United States to repay its loans?
There is no doubt that the Chinese trade surplus with the United States helped it to be the second largest lender to it after Japan. Chinese lenders, especially the Chinese government, use the dollars that are available to them as a result of selling Chinese goods in the US markets to buy US Treasury bonds, and Chinese demand helps Treasury bills, in keeping the US interest rate low, which encourages major investors in the United States to borrow from banks to expand their investment activity, and by borrowing at low interest rates, Congress can increase federal spending to stimulate US economic growth.
Through this circle of overlapping economic interests between the two countries, the value of Chinese loans to the United States increased, and with this the hypothetical question remains: What would happen if China asked the US government to pay off its debts, or decided in a fit of anger to harm the American economy and sell Those bonds to cause great havoc in international markets?
About that, Adam Jeffrey, chief investment analyst at the Financial Service Group, believes that Beijing could do so if it wanted to. He told Al-Eqtisadiah that if China flooded the market with US treasury bonds, and the supply rose, the biggest impact would be on interest rates and bond prices, and borrowing would become more expensive for US companies and consumers, and it would lead to a slowdown in the growth of the US economy.
According to this scenario, China’s disposal of US Treasury bonds may cause others to panic and sell what they have, which may mean a violent economic crisis for the United States, but this view is not accepted by a wide range of experts, who believe that these are scenarios existing in the minds of politicians and the public. Of the citizens, more than it is an economic fact that a country with the weight of China may resort to in the international community, as it will give a negative impression about China’s economic behavior in dealing with its opponents in times of crisis.
The debt issue is a complex issue in general, and it often gets more complicated in the American case. US debt in the form of Treasury bonds is still very desirable in the global economy, taking into account the status of the United States as the first international economy, and the evaluation of those debts is done in the US dollar. That is, in the currency printed by the United States, which is the dominant currency in the international economy, whether at the level of global trade or bank reserves.
In short, any debt owed by the United States to China in the form of treasury bonds, and if China desires to get rid of them by selling them in the international markets, it will always find a buyer for them. For example, in August 2015, China reduced its holdings of US Treasury bonds by about $ 180 billion. From this huge number, the selling did not significantly affect the US economy.
Dr. David Hirst, a former economics professor at Peking University and a current consultant to a number of financial institutions, says, “In contrast to the current concern of American politicians about the huge increase in Chinese loans to their country, there is a prevailing feeling among a large sector of Chinese that these loans are not beneficial to their country.” David argued that both views are governed by unjustified economic anxiety.
He adds, “China needs to keep large reserves of debt on the United States in the form of US treasury bonds, because that helps the Chinese economy to grow. The demand for treasury bonds raises the value of the dollar compared to the yuan, and if China suddenly gets rid of those treasury bonds, the exchange rate Its currency will rise, which makes Chinese exports more expensive in foreign markets. Therefore, China’s holdings of US debt give China a strong position to ensure a low exchange rate for its national currency, which contributes to supporting its foreign trade.
Consequently, China’s claim to the United States of its debts will lead to a severe decrease in the demand for the dollar, and the collapse of the dollar will affect international markets and create a financial crisis greater than the 2008 crisis, and then China will also emerge as one of the biggest losers, as global demand for its products will decrease, and in fact Some believe that the US debt issue owed to China is more a political issue than an economic problem for the two countries.
China is not the largest creditor to the United States, but is ranked second after Japan, whose total loans to the United States are estimated at 1.2 trillion dollars. Thus, Japan and China possess about 5.2 and 4.6 percent of the total debt of the United States, respectively. However, it does not receive American debt. Owned by Japan is the same amount of negative attention as the debt owned by China by American politicians and media, and the reason for this may be that Japan is viewed as a more friendly nation to the United States, and its economic growth does not represent a challenge to the economic position of the United States as it is the case of China.
For his part, John Turner, an economic researcher on Chinese affairs, believes that the common saying that “the Chinese, as a result of their huge loans to the United States, has become an exaggerated and unrealistic statement.”
He says to Al-Eqtisadiah, “4.6 per cent of the national debt is not a highly influential percentage in an economy of the size of the US economy, but the US debt ratio to China jumps to 15 per cent if it is measured as a percentage of the total debt of US bills and treasury bonds estimated at seven trillion dollars. However, the US Treasury did not face any problem in finding buyers for its bonds, even after the downgrade of the US credit rating.
“If China suddenly decides to ask the federal government to pay off all of its debts, and this is practically not possible – given the different maturities of debt securities – then it is possible that others will intervene to buy that debt, taking into account that the Federal Reserve already owns about three Times China’s debt. “
With this, China has reduced its holdings of American debt since 2011, when it had 1.3 trillion dollars, and it is expected that China will go in this direction not as a result of trade disputes with the United States – despite the negative impact of those disputes and contribute to reducing the volume and value of Chinese exports to the American markets. And, with it, the Chinese dollar surpluses with which it buys US Treasury bonds – but the real reason for China’s tendency to reduce its purchases of US Treasury bonds is its desire to convert the yuan into an international currency.
In turn, he tells Al-Eqtisadiah, a banking expert, Pepper Black, that China continues to buy US Treasury bills and bonds, which are like loans to the United States, and that buying process means continuing to strengthen the dollar’s position in the international economy, and this contradicts China’s desire to strengthen its currency’s position in International markets, which requires a gradual disengagement between the yuan and the dollar, and making the Chinese currency more attractive to forex traders in global markets. ”
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