Let me make it clear: China has been purchasing the US debt not because America needs China to finance its activities; on the contrary, China is forced to buy US bonds to sustain its trade surplus with the US.
In other words, Chinese purchases of US government bonds are not made to accommodate US needs; instead, they are necessary for Beijing to continue running current account surplus to provide domestic employment and relative domestic stability.
This might not sound intuitive at first, so let me explain fascinating economics behind US-China trade imbalances.
According to the balance of payments, if a particular country runs a current account surplus, then, by definition, it must run capital account deficit. This means that a surplus state will be a net capital exporter, whereas deficit countries - net capital importers, since they will need to finance their trade deficit with borrowed money.
According to the balance of payments equation, current account deficit always equals capital account surplus, and reverse.
Consequently, if China has trade surplus, it must run capital account deficit!
Purchases of the US Treasuries are one of the forms of capital outflows. It follows then that China buys US debt to continue running trade surplus with the US.
Why? By accumulating US Treasuries, China increases demand for dollars, thereby appreciating the dollar’s value and making China’s exports to the United States cheaper, while American imports to China - more expensive.
As a result, trade imbalance emerges: China runs a trade surplus thanks to more competitive exports but, because of lower currency value, it has capital account deficit. The reverse is true of the US economy: it has trade deficit, but runs capital account surplus.
All in all, China purchases US Treasuries to run trade surpluses — not, as many think, to “help” American consumers so that they can purchase more Chinese imports.
Answered by ;
Sukhayl Niyazov
Aspiring social scientist and AI researcher.thru Quora
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