Why China is Forced to Purchase US Treasuries

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October 11th, 2020 at 11:57:44 PM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 980
Posts: 11454
It has become conventional wisdom among ordinary people to think that Chinese purchases of US Treasuries are the “generosity” of the Chinese who are willing to lend to Americans so that they can purchase Chinese imports.

(1) Have you heard this theory?
(2) Do you think it is true?
(3) What would happen if the Chinese stop buying US treasuries?

There will be a follow up question to #3.

Why China is Forced to Purchase US Treasuries
China buys US bonds to sustain its trade surplus with the US
Sukhayl Niyazov Sep 5, 2019
https://medium.com/datadriveninvestor/why-china-is-forced-to-purchase-us-treasuries-778058575145

It has become conventional wisdom among ordinary people to think that Chinese purchases of US Treasuries are the “generosity” of the Chinese who are willing to lend to Americans so that they can purchase Chinese imports.
Nothing can be farther from the truth.

China purchases US government bonds not to accommodate US needs; instead, Beijing does so to continue running the current account surplus to provide
domestic employment and relative domestic stability.
In order to understand why, we have to delve deeper into the basics of economics, so let me explain the dynamics of the balance of payments, which are key to examining the US-China economic ties.

BALANCE OF PAYMENTS
Here is the balance of payments equation:
Current account + Capital account = 0
Why does this equal to zero? We can derive the equation from several variables.

Demand for the US dollar comes from
1. American exports (foreigners buy US goods and services, American companies then exchange earned foreign currency for dollars, driving up demand for the dollar)
2. Capital inflows (foreigners invest in the US economy, increasing demands for US assets and consequently dollars)

Supply of the US dollar comes from
1. Foreign imports (Americans, after purchasing foreign goods and services, gave their dollars to foreigners, and foreigners increase the supply of dollars because they want to exchange them for their country’s currency)
2. Capital outflows (Americans investing abroad sell their dollars to purchase foreign assets, increasing supply of dollars)

Demand = Supply, therefore
Exports+ Capital inflows = Imports+ Capital outflows
(Exports-Imports) + (Capital inflows-Capital outflows) = 0
Current account + Capital account = 0

The current account consists of visible trade (export and import of goods), invisible trade (export and import of services), unilateral transfers, and investment income (income from factors such as land or foreign shares). The credit and debit of foreign exchange from these transactions is also recorded in the balance of current account. The resulting balance of the current account is approximated as the sum total of balance of trade.

The components of the capital account include foreign investment and loans, banking and other forms of capital, as well as monetary movements or changes in the foreign exchange reserve. The capital account flow reflects factors such as commercial borrowings, banking, investments, loans, and capital. Source: Investopedia.
As can be inferred from above, because the sum of two accounts equals zero, an increase in one variable means a decrease in another — consequently, if a particular country runs a current account surplus, then, by definition, it must run the capital account. (current account surplus/deficit is essentially the same thing as trade surplus/deficit).

CHINA AND US DEBT
Current account + Capital account = 0
Therefore, since an increase in one variable means a decrease in another, if China has a trade surplus, it must run a capital account deficit!
What is a capital account deficit? It is when capital flows from the homeland (that is, China) to foreign economies (in our case, the United States).
Purchases of the US Treasuries are one of the forms of capital outflows. It follows then that China buys US debt to continue running a trade surplus with the US.
When seen from a different perspective, by accumulating US Treasuries, China increases demand for dollars, thereby increasing its value and making its exports to the United States cheaper, while American imports to China — more expensive. As a result, trade imbalance emerges: China runs a trade surplus thanks to more competitive exports and has a capital account deficit. The reverse is true of the US economy: it has a trade deficit but runs capital account surplus.
Why does China want to run a trade surplus?

China remains an export-depended economy (even though it is currently trying to shift its economic model).

Therefore, it needs to run a current account (or trade) surplus. If it does not, China will face either more unemployment, for reduced exports mean that the Chinese exporters are forced to lay off workers, or more debt, as Beijing will encourage large fiscal transfers to the households (social security, unemployment benefits, food stamps, etc.) or the creation of new businesses to mitigate the consequences of unemployment. All this requires more money and, consequently, more debt.

This is why China purchases US Treasuries: to run trade surpluses and avoid higher debt/unemployment — not, as many think, to “help” American consumers so that they can purchase more Chinese imports.
October 13th, 2020 at 3:48:42 AM permalink
odiousgambit
Member since: Oct 28, 2012
Threads: 114
Posts: 2933
I always appreciate the effort it takes to post something, the more so the more effort that was put into it, and this is a good topic too.

But honestly that medium.com article has defeated my efforts to absorb it, twice now, even though if I put the effort into it I think I'd eventually glean the gist of it. So, I apologize, but, you know, we all have to decide how much time to invest in anything. I get a newspaper almost every day and most of the time [weekend excepted] I read only the headlines and maybe one article. It's the reality of the time and energy one is allotted to get through every day doing everything .

What I'm getting at is, if you or someone did not have this difficulty, maybe you could break down that article for us?
The light at the end of the tunnel can be a freight train coming the other way!..Fleastiff
October 13th, 2020 at 8:33:59 AM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 980
Posts: 11454
This Forbes article has a clearer heading.

Are U.S. Treasuries An Assassin's Mace Or China's Trump Card? Weaponizing Treasuries In A Trade War?

While it is true that China is not engaging in a massive sell-off, they have largely ceased to buy new US Treasuries. With our massive deficit, someone has to buy them, so the FED is forcing US banks to buy paper to make up for China's lack of buying.

MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES (in billions of dollars)
July 2020 vs July 2019
$1293.0 Japan $1131.2
$1073.4 China $1110.3
$424.6 United Kingdom $406.8
$330.8 Ireland $257.3

Only China of the above 4 countries has dropped its holdings.

+28.57% Ireland
+14.30% Japan
+4.38% United Kingdom
-3.32% China, Mainland

China has in fact been slowly dumping US Treasuries for 7 years now (but especially since Trump was elected)
2020-07 $1,073.41 billions
2019-07 $1,110.30
2018-07 $1,171.03
2017-07 $1,166.91
2016-07 $1,218.84
2015-07 $1,268.75
2014-07 $1,264.90
2013-11 $1,316.72
October 13th, 2020 at 2:16:34 PM permalink
Fleastiff
Member since: Oct 27, 2012
Threads: 62
Posts: 7751
Peace is war waged at less than intimate means, cu4ency t4ansdfers are trade waged at jless than ultimate needs.
October 13th, 2020 at 3:06:00 PM permalink
petroglyph
Member since: Aug 3, 2014
Threads: 24
Posts: 5279
Quote: Pacomartin
This Forbes article has a clearer heading.

Are U.S. Treasuries An Assassin's Mace Or China's Trump Card? Weaponizing Treasuries In A Trade War?

While it is true that China is not engaging in a massive sell-off, they have largely ceased to buy new US Treasuries. With our massive deficit, someone has to buy them, so the FED is forcing US banks to buy paper to make up for China's lack of buying.
China was buying treasuries so the value of the Yuan didn't go up precipitously, damaging their export advantage.

If China were to "dump" treasuries, that would devalue the trillions of dollars worth that they hold. The smartest thing they can do with them, is buy as much of Africa with them as they can. Africa is the last continent full of potential debtors for the banks to indenture. And what a continent it is.

Not only has China reduced treasury purchases to nil, but also the other country's that have been sanctioned. Russia, Venezuela etc. We bit off our noses with that move.
Everyone gets thrown from the plane to maintain altitude
October 13th, 2020 at 3:44:05 PM permalink
AZDuffman
Member since: Oct 24, 2012
Threads: 128
Posts: 13484
Quote: petroglyph


If China were to "dump" treasuries, that would devalue the trillions of dollars worth that they hold. The smartest thing they can do with them, is buy as much of Africa with them as they can. Africa is the last continent full of potential debtors for the banks to indenture. And what a continent it is.

Not only has China reduced treasury purchases to nil, but also the other country's that have been sanctioned. Russia, Venezuela etc. We bit off our noses with that move.


China is being a bit like an automaker that has to loan money to buyers to move the iron. They might take a loss on the loans but meantime the factories hum along.
The man who damns money has obtained it dishonorably; the man who respects it has earned it
October 13th, 2020 at 6:43:24 PM permalink
petroglyph
Member since: Aug 3, 2014
Threads: 24
Posts: 5279
Quote: AZDuffman
China is being a bit like an automaker that has to loan money to buyers to move the iron. They might take a loss on the loans but meantime the factories hum along.
Country-wide "channel stuffing".
Everyone gets thrown from the plane to maintain altitude
October 13th, 2020 at 8:03:02 PM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 980
Posts: 11454
Quote: petroglyph
If China were to "dump" treasuries, that would devalue the trillions of dollars worth that they hold.

The smartest thing they can do with them, is buy as much of Africa with them as they can. Africa is the last continent full of potential debtors for the banks to indenture. And what a continent it is.


Everyone says that China dumping US treasuries will hurt them more than help them. But if it keeps us from getting involved militarily with retaking Taiwan, won't it be worth the sacrifice? Taiwan is a dominant economic power in SE Asia.

Rank IMF GDP (nominal) USD$ billions
16 Indonesia $1111,713
— Taiwan $586,104
22 Thailand $529,177
— Hong Kong $372,989
33 Malaysia $365,303
34 Singapore $362,818
36 Philippines $356,814
44 Vietnam $261,637

Quote: petroglyph
Not only has China reduced treasury purchases to nil, but also the other country's that have been sanctioned. Russia, Venezuela etc. We bit off our noses with that move.


CHINA HOLDING OF TREASURY SECURITIES (in billions of dollars)
2020-Jul $1,073.41 - latest data
2017-Jan $1,051.10 - Trump inauguration
2013-Nov $1,316.72 - peak

I doubt that is a coincidence.
October 15th, 2020 at 2:03:55 AM permalink
Tanko
Member since: Aug 15, 2019
Threads: 0
Posts: 460
Quote: Pacomartin
(3) What would happen if the Chinese stop buying US treasuries?


If they hoarded the trillions in US currency they've accumulated, and not purchased US Treasuries with some of it, the value of the US dollar would climb.

Now, for the first time, Beijing is selling bonds to US investors.

"Investors were also drawn to the Chinese bonds’ high yields compared to those issued by the US government. The bonds carried maturities of three, five, 10 and 30 years with coupons of 0.40, 0.55, 1.20 and 2.25 per cent, respectively. That put the yield on the 10-year bond at about 0.5 percentage points above the equivalent tenor US Treasury."

Beijing’s First Bond Offer To US Investors Draws Record Demand

Our leaders blew it. The 21st century belongs to China.
October 15th, 2020 at 3:10:33 AM permalink
AZDuffman
Member since: Oct 24, 2012
Threads: 128
Posts: 13484
Quote: Tanko


Our leaders blew it. The 21st century belongs to China.


Worry not, China is peaking if she has not peaked already. Demographic decline will hit her and potentially tear her apart like the USSR.
The man who damns money has obtained it dishonorably; the man who respects it has earned it
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