The US Treasury is issuing substantial amounts of debt to fund government expenditure. In actuality, this week, it commenced auctioning securities worth $112 billion. The overall debt stands at approximately $34 trillion, albeit with slight variations depending on the calculation method. Around one-third, or 30%, of the publicly held national debt is in the possession of foreign countries and foreign investors.Thank you for reading this post, don't forget to subscribe!
Japan currently holds the largest foreign share of US debt, followed by China. This raises the question: Is China depleting its American funds? And if so, does that pose a problem?
According to Win Thin, the global head of currency strategy at bank Brown Brothers Harriman, “As of August, China’s total holdings in US Treasuries stood at about $805 billion, the lowest since June 2009.” The reasons behind China’s actions, and whether it is indeed selling its US Treasuries, are subjects of intense debate. One possible theory is that China needs to sell these Treasuries to bolster the yuan, Thin suggests.
Selling Treasuries provides a swift method of supporting the US dollar, as China can use the surplus dollars to participate in the global market and purchase its own currency. By doing so, it artificially elevates the value of its currency, comparable to arranging for someone to bid higher at an auction.
This proposes one idea. Another reason China is losing Treasury holdings pertains to trade.
China’s stake in American treasuries amounts to billions. (Courtesy of Win Thin, Brown Brothers Harriman)
“Trade barriers set by President Donald Trump and continued by President Joe Biden explain a significant portion of the decline in China’s purchases of US Treasuries,” stated Kent Smetters, a Wharton School professor.
With the inclusion of sand in international trade, China is not generating as many dollars, thus reducing its storage in the treasury, according to Smetters.
Lastly, the third argument asserting that China is disposing of its treasuries suggests otherwise. It merely gives the impression of such actions.
“China employs offshore custodians to retain some of its US dollar-denominated assets,” explained Christopher Vecchio, head of futures and foreign exchange at TastyLive, a research group for options brokerage.
Vecchio suggested that China might merely be concealing its treasure to safeguard its business from interference.
Regardless of the explanation, the question remains: Why should we concern ourselves with the level of foreign interest in our debt?
“We care about whether foreign governments or institutions purchase US Treasuries because it impacts the cost of borrowing in our country,” emphasized Jesse Wheeler, a senior economist at Morning Consult.
Here’s how it functions: The government must find creditors to meet its extensive borrowing requirements, and it casts a wide net.
“If this group is confined solely to American households, the government must offer higher returns on the debt to remain competitive,” stated Smeters of Wharton.
Consequently, this results in higher interest rates, including for home loans. Therefore, as long as Japan and China maintain an interest in our debt, it enables them to save money on mortgages.
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