China will keep buying US Treasury to remain competitive

There have been statements from Chinese government that US should do something about its debt, US debt is unsustainable or Gold/SDRs should replace dollar as reserve currency. When China is so much concerned about US debt then why China remains the biggest buyer of US debt?

China knows it well that buying US debt has kept its economy growing all these years, of course cheap labor and good manufacturing facilities are the other reasons for its growth but to keep its export oriented economy competitive China has to keep buying US debt.

China US treasury holdings

Chinese economy relies on export a lot. Exports and allied services account for almost 40% of Chinese GDP. Due to this high export China runs a very high current account surplus. Now, if a country is running a very high account surplus then its currency will start appreciating and eventually come to a level decided by free market forces which would make its export less competitive. In order to keep its export competitive and its currency restrained by appreciating, Chinese government buys US dollars in form of Treasuries.

renminbi vs Dollar

Renminbi has already appreciated from 8.2 to 6.5 in half decade and the labor is becoming costlier in China. Chinese government has not much options with them then to keep intervening and peg the Renminbi. China may also buy the government bonds of other country and Gold. But there are series of problems with doing that. Other bond markets are not as liquid and open as US bond market. Japan and Italy bond markets come after US in openness but there are problems with them. Italy is deep under sovereign debt crisis, so buying their bonds wouldn’t be a good idea. China can buy Yen but that wouldn’t help much because the amount of surplus China has Japan may be inefficient to suffice China’s appetite. US is the only so deep and open market where China can put its access money.

US trade with countries

This means that China will continue buying US dollars till its economy remains dependent on exports and till Chinese policymaker are reluctant to keep Renminbi pegged as their trade policy. Henceforth, China remains the highest holder of US debt among the foreigner with $1.6 trillion which is 8% of total US debt.

Hitesh Anand

I am a post graduate from Newcastle University, UK. I like studying and analyzing economic data and financial health of world.

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