Consider this, the U.S. has around $16 trillion in outstanding debt and most of it is held by us, and the bulge bracket banks here at home: Goldman Sachs, JP Morgan, Citibank,
Bank of America. Around 7.5 percent is held by China, the biggest foreign holder of U.S. debt.
One of the reasons why China has so much Treasury holdings is because of trade. Companies put money in short term Treasury notes and bills to settle trade payments. China's government could also call all of its own holdings and demand full payment of the money it lent us in principal plus interest, but under what circumstance would they do such a thing?
It would be a national security risk if China held a position where they could dictate U.S. policy on fiscal and monetary matters. They cannot.
If the economy was crashing and China got terrified and wanted their money back, unless the U.S. defaulted, it would hand it over and there would be nothing China would get in return. Moreover, when the U.S. economy was collapsing in 2008 all the way to the 666 low on March 6 in the S&P 500, China never retreated from Treasurys, or demand Congress get its finances in order or else it would choose to buy euros, or gold instead.
The Pentagon did an evaluation on the risks posed by China's ownership of U.S. debt in July and came to the same conclusion: "Attempting to use U.S. Treasury securities as a coercive tool would have limited effect and likely would do more harm to China than to the
United States."
The report was sent to congressional committees by Defense Secretary Leon Panetta, who called China's ownership of U.S. debt non-problematic and non-threatening.
The USBC's take is that Chinawants its holdings of Treasury debt to gain value, not lose value. And just because interest rates are going down, that doesn't mean China is losing value on those holdings. Lower interest rates might be bad for income generation, but they mean more demand for bonds, which means higher bond prices.
China wants the U.S. economy to prosper because that means China will be able to continue exporting here. As it is, exports from China to the European Union are all down. Exports to the U.S. are up. China is not in a position to threaten the U.S. with financial "terrorism" of any kind. A decision by China to sell off massive positions of U.S. debt would send the American economy into a downward spiral, harming not only the value of China's investments, but also China's export-driven economy.
The bigger issue for the U.S., says John Frisbie, director of the USBC in
Washington is the size of our fiscal deficit and the long term implications for the economy, not the level of China's debt holdings.
That's not how bonds work. Nothing in bond contracts entitles you to "request payment" immediately from the issuer. You can sell your holdings for an upfront payment, and if China did that, it would be fine for us and disastrous for them.
