U.S. Treasuries are notes issued by the U.S. government around the world and can be bought and sold in the market freely.
The two countries that hold the most U.S. debt are China and Japan, with $1.1 trillion (4.6% of total U.S. national debt) and $1.0 trillion (4.2% of total U.S. national debt) in dollars, respectively.
For decades, new bonds have been issued every year by the US government.
Because the U.S. government has strictly enforced its commitments since the issuance, U.S. bonds have an extremely high level of credit worldwide.
In the investment world, it is one of the higher yielding, most stable and reliable products.
If a person bought US bonds, does that mean the US government owes money to him or her?
Yes or no.
Under the contract of the bond, the U.S. government only needs to pay you back the principal after 30 years; in between, it only needs to pay you interest each year.
What if the investor need the money in a hurry? U.S. bonds are in circulation all over the world and people can sell them in the financial markets to anyone who is willing to buy. The selling price is determined by the market at the time.
The Chinese government has been buying U.S. bonds, part of which are purchased directly from the U.S., and a large portion of which are bought from other holders in the market.
The Chinese government sells the bonds, not to the US government either, but in the marketplace, where whoever offers more gets it.
More of the U.S. government’s national debt is held by U.S. businesses, individuals, local governments, and the Federal Reserve, at about 70 percent, compared to about 30 percent by foreign governments and investors.
Many Americans have bonds in their investment portfolios: the more conservative the person, the greater the percentage of bonds; the more radical the person, the greater the percentage of stocks.
Pension investments in older Americans have more bonds, as it has almost zero risk.
Where does China get so much money to buy US Treasuries?
China’s long-term export growth is quite strong. Exports of goods are in foreign currency (mainly in dollars).
China makes it mandatory for manufacturers to sell the foreign currency they receive to the state in exchange for RMB for domestic circulation. This is called Forced Settlement.
China’s long-term growth in exports has solved the employment problems of hundreds of millions of migrant workers and raised the living standards of the people. The Yangtze River Delta and the Pearl River Delta have prospered as a result.
2. Foreign Investment in China
Foreign investment wants to flow into China due to the continued appreciation of the Renminbi and China’s rapid economic development.
Why does China Buy So Much U.S. Debt with Massive Foreign Reserves?
Because there’s just so much money to spend.
The Chinese government also buys a lot of goods (like airplanes, food, etc.) abroad every year, and the amount is not small. But China’s exports are just too much, and there is nowhere to spend all the foreign currency. And it’s not like the Chinese government can buy whatever it wants, such as high technology, core equipment, weapons, etc. Many countries have restrictions on their exports to China because China is very good at “copying”.
Due to the huge amount of foreign exchange reserves, it is not possible to leave it untouched, the interest rate at the bank is too low, and the risk of buying stocks is too great, and buying bonds of other countries is also prone to accidents.
China is holding some Eurobonds and Japanese bonds in small amounts. However, they issue bonds on a small scale. Also, these bonds are not as safe as U.S. bonds.
Gradually, U.S. bonds became the only option because they were guaranteed, traded at a high volume, and had okay returns.
China buys a lot of US bonds and there are quite a few people who think the US is taking advantage of China, but it’s really a purely commercial act and no one is pushing anyone.
Will the U.S. Let the National Debt Depreciate on Purpose?
The largest buyers of U.S. Treasuries are domestic banks, institutions, and the American people, at 60-70%. If the US is going to lie and deliberately devalue, these debtors will be the first to object.