The Anatomy of Ownership
Chinese ownership of U.S. debt is primarily due to its exchange-rate policy, which fixes the value of its currency to the U.S. dollar at a rate that is lower than if it was freely traded in the marketplace.
To maintain this favorable exchange rate, China uses its currency to buy dollars, which must then be invested in dollar-denominated assets. It chooses to funnel them into Treasuries to keep its assets liquid and avoid the political objections that may follow the purchase of high profile U.S. assets, such as stocks or real estate.³
Is There a Danger?
This favorable exchange rate helps to promote Chinese exports. While low-cost Chinese products benefit American consumers, a major criticism of China’s currency policy is that low-cost exports have the potential to take away American jobs. This concern has abated somewhat due to the repatriation of manufacturing, lured by new sources of cheaper domestic energy sources created by fracking technology.
The dilemma with the U.S. desire for a stronger Chinese currency lies in the potential of higher interest costs on U.S. debt should the Chinese pare their purchases.
Chinese ownership may actually be more of a straight jacket than a means of leverage. Should China seek to unload its holdings, the move could drive Treasury prices down, hurting its own financial interests.
As J. Paul Getty once observed, “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”⁴
- FactCheck.org, November 19, 2014.
- Treasury.gov, March 2014. Data through January 2014. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury security prior to maturity, it could be worth more or less than the original price paid.
- The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Real estate property values can be significantly affected by economic downturns or changes in real estate pricing.
- BrainyQuote, March 2014.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by FMG, LLC, to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2014 Faulkner Media Group.