Why China Will Not Suddenly Sell Its United States Debt

The national debt of the United States is staggering and a huge problem. China is one of the biggest holders of this debt amongst foreign countries. This leads to worries from some that China will sell the debt in a sudden move to destroy the dollar and United States economy. There are many things to be concerned about with the national debt, but this isn’t one of them for a number of reasons.

Buyers

Let’s start with a simple pragmatic problem that would arise if China tried to take such action. To sell the debt it holds in treasuries and other debt instruments, it would need buyers. While there are buyers in the market, there are no where near enough to gobble up well over a trillion dollars in debt in a quick move.

There is only one other country that can be described as a massive holder of our national debt. That country is Japan. Despite all the wild statements being made about the rise of China and our indebtedness to it, the truth is Japan is in a similar position. At last count, the country owned just slightly fewer U.S. debt instruments than China. The problem, of course, is Japan is not buying other countries debt as it focuses on recovering from the brutal earthquake/tsunami/nuclear meltdown disaster it suffered recently. If anything, we might see Japan start to sell some debt to pay for this recovery.

Self-Defeating

Ah, but what if China could find a buyer for all the debt? What would stop it from moving then? The answer is simple – its own economy. As much as the United States has relied on China to buy its debt, China has relied on the United States to buy its products. By destroying the dollar, China would be destroying its biggest customer and that makes no sense at all. Let’s take a closer look.

China controls its currency by artificially pegging it to a certain position versus the dollar. If it was to sell off all our debt, that could no longer be possible because the dollar would deflate like a balloon let go by a four year old. China would have to free up its currency or watch it become worthless like the dollar. Upon freeing it up, the value of Chinese good would go through the roof. In combination with a nearly worthless dollar, Americans would simply be unable to buy Chinese goods. This would result in a massive depression with brutal unemployment problems in China as businesses failed right and left as sales plummeted.

Does this sound like something China wants to you? Not likely.

Slow Ride

With apologies to classic rock band Foghat, China would be better off taking a “slow ride” to get rid of the debt instruments it is carrying. In fact, it is doing just this. As the national debt instruments come up for payment, the Treasury is issuing new debt to pay off these notes. The Chinese are buying less of the debt and only treasuries that mature in a few years. In taking this approach, China keeps the U.S. dollar propped up while slowly reducing its exposure to the debt.

Who Buys?

If China isn’t buying the new debt and Japan is in trouble…who is buying it? The answer is smaller investors and the Federal Reserve Bank. Yes, you read that right. The Fed is actually the biggest buyer of our debt and has been for some time. This could soon become a real problem. Why? The Fed has announced it wills top buying the debt at the end of June.

Who will buy the debt then? It is anyone’s guess.

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