A doomsday scenario!

China 01

Here’s an absurd article from a few years ago…

Chinese Leaders Threaten To Sell US Debt as Punishment For Taiwanese Arms Sale

The doomsday scenario we’ve feared since World War II has arrived.

A doomsday scenario!

In response to the United States’ latest arms sale to Taiwan, the Chinese military has suggested that China sell off some of the U.S. debt it owns to give the U.S. an economic punch of sorts.

Oh no! That would be a terrible blow to the USA. (Not.)

Senior Chinese military officers have proposed that their country boost defense spending, adjust PLA deployments, and possibly sell some U.S. bonds to punish Washington for its latest round of arms sales to Taiwan. The calls for broad retaliation over the planned U.S. weapons sales to the disputed island came from officers at China’s National Defence University and Academy of Military Sciences, interviewed by Outlook Weekly, a Chinese-language magazine published by the official Xinhua news agency.

So let’s see. China sells goods to the USA in exchange for dollars. China deposits those dollars at the Federal Reserve in order to gain interest, and to move dollars out of China so that dollars cannot displace the local Chinese currency. China likes U.S. Treasury securities, because they are the safest in the world, since the U.S. government can create infinite dollars that are accepted worldwide. China deposits its dollars at the Fed by purchasing T-securities. China threatens to sell those T-securities to someone else. China would then collect money for those Treasuries, but would sacrifice the interest that China would have been paid. (The new owners would collect the interest.) The money that China initially deposited at the Fed would stay in the Fed.

And this would harm the USA…how again?

I mention this because most people pretend that the U.S. government is “bankrupt.” Hence they pretend that the U.S. government runs on tax revenue, and on loans (in dollars!) from China. Therefore they believe that China could harm the USA by “dumping China’s bonds,” or by “calling in China’s loans.”

Nonsense. The truth is that China could sell all its T-securities tomorrow, and it would hurt no one except China, which would lose the interest that China would have been paid. The money that China deposited at the Fed would stay at the Fed. It would simply have new owners.

As far as China “calling in its loans,” this would just be a matter of giving China’s dollars back to China without interest. It would have no effect on the U.S. government’s ability to keep creating money.

So ignore whatever you hear about China using the (fake) “national debt crisis” to “threaten” the USA. It’s nonsense.

I just saw a different article that is full of nonsense. Examples…

China’s position as America’s largest banker gives it some political leverage. Every now and then, China threatens to sell part of its debt holdings. It knows that, if it did so, U.S. interest rates would rise, which would slow U.S economic growth.

“America’s largest banker” is the Fed, not China. And if China sold its T-securities, it would have no effect on U.S. interest rate. The Fed decides the “overnight” rate and the Fed funds rate based on many factors, of which China is only one.

What would happen if China called in its debt holdings? China would not call in its debt all at once. If it did so, the demand for the dollar would plummet like a rock. This dollar collapse would disrupt international markets worse than the 2008 financial crisis. China’s economy would suffer along with everyone else’s.

China cannot “call in its debt holdings.” China has money on deposit at the Fed. China cannot get that money out of the Fed until China’s T-securities mature. But China can sell its T-securities to others, and sacrifice the interest that China would have been paid. This would harm China, but not the USA. The U.S. government does not borrow its spending money. So how could China “call in its holdings”?

And now here’s some nonsense from “Investopedia”…

China offers loans to the US so that the US can keep buying the goods China produces.

Huh? China cannot create dollars, but China lends dollars to the USA so the USA can spend those dollars on Chinese goods? Ridiculous!

And again…

Hence, as long as China continues to have an export-driven economy with a huge trade surplus with the US, it will keep piling up US dollars and US debt. Chinese loans to the US, through the purchase of US debt, enable the US to buy Chinese products.

Nonsense. Dollars don’t originate in China. Dollars originate in the U.S. government, and in U.S. banks that make loans. That is what buys Chinese goods. “Loans” from China are simply dollars that China deposited at the Fed, after getting those dollars from outside China.

Some people fear that China might “dump” its T-securities. What does that mean? Simply that China would sell its T-securities to someone else, and forgo the interest.

It’s trivial, but people like that word dumping. “China is dumping U.S. debt!”

Like the “debt-to-GDP ratio,” its sounds dramatic, but it is meaningless.

China 02


5 thoughts on “A doomsday scenario!

    1. So much of China’s economy is based on selling goods to the USA in exchange for U.S. dollars that U.S. dollars would drown out Chinese yuan inside China if China was not careful. If Chinese people inside China started using dollars for their everyday transactions, then China would be at the mercy of U.S. banks and the U.S. government, which are the masters of the U.S. dollar.

      (“Yuan” is the foreign name for China’s currency. Inside China the yuan is called the “renminbi,” which means “people’s currency.”)

      Therefore the Chinese government does not want U.S. dollars circulating inside China. It does not want people inside China to use dollars for their everyday transactions. When a Chinese company sells goods to the USA in exchange for dollars, the Chinese government wants that Chinese company to trade its dollars to the Chinese government for yuan, or else to invest those dollars outside China. Either way, the dollars are not allowed to pile up in China. The Chinese government (or Chinese companies) invests dollars abroad by purchasing real estate, or corporations, or T-securities that are valued in dollars, or in some currency that is easily converted to dollars.

      The point is to prevent dollars from piling up inside China. That’s why the Chinese have purchased so many T-securities. If they can’t keep dollars inside China, where can they invest them? Answer: the U.S. Fed.

      But wait…how many Chinese yuan are equal to a US dollar? At this moment it is about 6.5 yuan to the dollar. But why 6.5? Why not 2 yuan to the dollar, or 20, or 2000? Who decides what the yuan is worth?

      Outside China, the decider is the Forex market (Foreign Exchange), which is the biggest market in the world. It dwarfs all stock markets, bond markets, and commodity markets combined. The value of the Chinese yuan in ratio to the U.S. dollar constantly fluctuates according to the vagaries of the Forex market. It changes from minute to minute.

      But inside China (and this is the key) the exchange rate of yuan-to-dollars is decided by the People’s Bank of China on a daily basis. The People’s Bank may or may not set the exchange rate inside China to coincide with the exchange rate outside China. If the People’s Bank rate (inside China) differs from the Forex rate (outside China), then Americans claim that China is “artificially” depressing (or inflating) the yuan.

      There are private currency traders inside China, but they are highly regulated. They are limited by law to pushing the yuan only 2% stronger or weaker than the official Bank of China exchange rate inside China. “Stronger” means the dollar buys fewer yuan. A “weaker” yuan means the dollar buys more yuan in exchange.


      The People’s Bank of China sets the exchange rate inside China. Sometimes the Bank decides to “weaken” the yuan. That is, instead of 6.5 yuan to the dollar, the Bank decides that today a dollar is equal to only 6 yuan or 5 yuan. Americans call this “devaluing the currency.” The People’s Bank does this because China competes with other nations that have their own sweatshops like China does. The Bank of China may weaken the yuan (i.e. “devalue it”) in order to make Chinese goods a bit cheaper for foreigners to buy. Or the Bank of China may strengthen the yuan in order to control inflation, such that dollars buy fewer yuan.

      Sometimes the Bank of China even influences the Forex market rate outside China by buying or selling large amounts of foreign currency (e.g. dollars). Americans call this “currency manipulation.” If China’s central bank buys large amount of dollars, and the bank exchanges them for yuan, then more yuan circulate outside China. This affects the Forex market outside China.

      Central banks do this in many nations, but the USA cries about China, because the USA is so wedded to China.

      So what’s all the fuss? Some people say that a weaker yuan causes the trade deficit to widen between the USA and China. Other people say, “So what? If China makes its goods a bit cheaper to buy (i.e. dollars buy a bit more Chinese goods) then what’s the problem? As long as the Chinese keep accepting dollars for their exports, what’s the issue?”

      I myself think it is a non-issue.

      SIDE NOTE: Before 2009, if a Chinese company sold goods to the USA in exchange for dollars, the Chinese company could not collect dollars. All international transactions went through the Bank of China, which converted dollars to yuan, and then paid the Chinese company in yuan. As a result, very few yuan circulated outside China.

      In June 2009, China formed agreements with Russia, Vietnam, Sri Lanka, Thailand, and Japan to do exchanges directly Chinese in yuan outside China. South Africa and Australia joined too. As a result, the Chinese yuan has become a widespread reserve currency in Asia. That is, the yuan became an intermediate currency that foreigners from different countries can convert their own currencies into. Left-leaning governments (e.g. Venezuela) like this development, because they don’t like being at the mercy of one group of money masters (the Americans with their dollars).

      Does any of this make sense? If not, I will try to re-explain it by coming from some other angle.

      Liked by 1 person

      1. Makes sense, thanks! BTW you mesmerize me by your level of knowledge. Did you study economics in college or just on your spare time?


        1. I was a bank loan officer once, which is near the bottom of the pecking order, and requires little ability. Other than that, I have no specialized knowledge. I merely speak in general terms. However I do have an itch to cut through b.s. Once you see the truth of things, the details fall in place. But thanks for your compliment. 🙂


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