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US$-CH

Can China take over the US?

The Chinese sold $48 billion in Treasuries. That’s by far the largest amount ever. Should the USA be worried? Not yet.

They still own $1.3 trillion in U.S. bonds. It is the largest foreign holder of U.S. federal debt, which is why many people say China owns the USA.

The USA has more options than China who got to this point.

The Chinese do not really have what to do with this amount even if they turn the debt in to hard currency.

Since China’s economy model is flexible, and this money was accumulated though years of exporting to the west while importing next to none, and they cannot reverse the trade overnight, there is not much they can do now. If the central Bank of China would sell treasuries and buy Yuan, two things will happen. First, the Yuan exchange rate will rise dramatically. This will make Chinese exports even more uncompetitive, on top of the situation where wages and land prices have risen over the years. It would also result in widespread unemployment.

Second, the Bank of China’s balance sheet will shrink, draining the money supply. Very bad news for the Chinese credit system that is bigger than the one in the USA.

They might consider selling treasuries and buy gold and other dollar assets, but to what extent? The United States treasury market is the largest, most liquid, and the deepest capital market in the world. No other nation can afford to absorb $1.3 trillion, instantly.

So Beijing is forced to hold on to an asset that—thanks to the US Federal Reserve’s carries a low-to-negative real interest rate and cannot be sold in bulk.

If the Chinese might want to play a game and sell in bulk, the United States Federal Reserve could absorb it as a buyer of last resort.

J.Paul Getty

J.Paul Getty

The USA owes the People Republic of China $1.3 trillion. In this case, China is the bank, and they have a problem.

26 Feb. 2014, by Eli Beck

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