As a result of large recent trade surpluses, China (in particular, its central b

Question

As a result of large recent trade surpluses, China (in particular, its central bank, the People's Bank of China) holds a large portfolio of U.S Treasury securities. The exact amount is unknown but is thought to be in the neighborhood of one trillion dollars (some neighborhood!). a) What fraction of the total Treasury debt (held by the public) is accounted for by the Chinese trillion dollar holdings? b) Suppose China, whose economy is slowing, decided to dump a large part of its Treasury holdings onto the bond market where private investors would purchase them. Given that the U.S. Treasury, would not be a purchaser of the securities, why would this event be a problem for the Treasury? c) Why would this dumping strategy likely backfire on the Chinese?

Explanation / Answer

(a) As of today, US total public debt is $19.26 trillion (Source: www.usgovernmentdebt.us).

So, fraction of this debt held by Chinese = $1 trillion / $19.26 trillion = 0.0519 (5.19%)

(b) When China dumps this $1 trillion debt into US bond market, non-treasury investors purchase this and therefore, supply of money (dollars) in the economy will fall. So the Treasury will be facing a contractionary monetary phase in the economy with lower money supply.

(c) Most likely, this strategy will backfire on the Chinese. As money supply falls in US economy, aggregate demand in US will decrease, resulting in lower consumption demand and lower import demand. China is the the largest trade partner of US and Chinese trade comprises the biggest share of US total trade and balance of payments. So, lower import demand by US consumers will immediately decrease the demand for Chinese goods. So, China will face a lower export demand (from US), which will lower Chinese next exports and decrease Chinese aggregate demand & real GDP.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.