China "dumping US debt" - please explain to me in the most layman terms possible

Hopefully some Doper(s) can, in a few words, explain to me in very-very-layman terms the “China dumping US debt” thing/threat that is oft-mentioned:

China holds US debt - lots of it - but how does it “dump” it unless someone wants to buy the debt? Does China say to Russia, “Hey Moscow, since you’re a friend, here’s $1 trillion of US debt in bonds, we don’t want it anymore, but we’ll sell it to you cheap for $200 billion but you get to go to Uncle Sam and tell them that they owe you a full trillion?”

Why would it be in Beijing’s interest to do that?

Also, if China wanted to dump debt, does it find a specific buyer country and approach them to pitch the idea, or does it sort of hold up US debt with one hand and say, “All you other 193 countries, you see this, who wants it? Bid a price.”

They sell it on the bond market. This drives down the demand for ‘new’ US debt and could force the US to raise interest rates. They also refuse to buy more US debt. This means we might have to raise rates to attract new buyers. What you have to do is think of a bond as paying money in order to get fixed payments over time. Once the bond is in the general marketplace, then anyone can pay whatever they would like in order to get those fixed payments. So when China ‘dumps US debt’ what they are doing is selling off our we’ll call it a ‘mortgage’ (to better understand it) to another lender. The danger is that the US runs out of people willing to loan it money and that forces us to incentivize buyers, typically by agreeing to pay more interest on their loan.

So, very simplistically. I go to the bank for a mortgage. I promise the bank that I will pay 1000 a month for 30 years. In exchange, the bank gives me say 200 thousand dollars. The bank can then sell that 1000 a month to someone else for whatever they would like. If they are ‘dumping it’ it probably means they are selling it for less than what they paid usually because they think that you’re going to default. Usually though, they try to make a little on it and big mortgage companies who are less concerned with immediate gains will snap it up for slightly above what the bank paid. The more debt I have though, the more likely I am to default, so that lowers the value that other people are willing to pay for my debt. If I have a bunch of debt and everyone is trying to sell it and no one is buying it, that makes my debt value go negative. If my debt value goes negative, no one is going to want to loan me money anymore because they will have to take a loss if they resell it. To make up for that, if I still want to borrow, what I generally have to do is agree to pay more money per month or extend the term. So that people that wouldn’t touch my 1000 a month, may think that if I paid 1050 a month, they can recoup those losses.

The mechanism is different for US debt, especially with Treasury bonds since they tend to set their own rates and the market always is willing to buy them, but the general concept is the same. If China sells off a bunch of US debt, the demand for US debt goes down and we have to pay people more money in the long run for them to loan us money.

As for who buys it, anyone can buy it. If you have a retirement account, you almost certainly already own some. Countries can buy it, but so do banks, investment groups, retirement accounts or anyone else that wants a low-yielding, but historically incredibly stable investment.

You go it on the first try. China owns billions in US treasury bonds, bought with all those dollars paid to Chinese companies to make goods for American stores.

The threat is, they could go to the open market or cut a side deal with any other countries or companies with money to spend - “wanna buy some US treasury bonds?” Presumably the objective for “dumping” is to teach the USA a lesson. So they would sell them at a loss because they are willing to lose money to teach the USA a lesson.

What then happens is they sell, say, thousands of million dollar Treasury bills at less that market value - let’s say, they sell so that the price is 10% lower than face value. That means when the USA goes to finance its next round of debt, it’s competing with its own treasury bills already on the market at a lower price - so to sell anything, it ha to promise a higher interest rate. Instead of selling treasury bills at say, 4% it has to offer 14%. It would also mean the US dollar would be worth less on foreign markets. Inflation at home may follow… etc.

Whether China wants to blow its foreign reserves this way is an interesting question. Depends how badly Washington pisses them of.

The “debt” is treasury bonds. Anyone can buy them, not just foreign governments. You probably own some yourself, if not directly then as part of some investment package.

OK thanks, senoy, really really helpful… But who would/could buy the debt that China is dumping, unless China were to sell it for a big discount? There seem to be pretty few nations that have the money or willingness to pay $1 trillion to buy up what Beijing is dumping (everyone is tight on money in their own way).

And is the “bond market” like a global Craigslist, if you will, where the first buyer to come knocking for a product (in this case, US debt,) or is it more like an auction where Beijing dangles US debt and waits for the highest bidder?
ETA: Ninja’d, there were already other answers by the time I hit post here. I see those addressed my points in this comment.

keep in mind that the US Feds generally spend about 20% more than it takes in each year - so the mortgage analogy includes the idea that you go back to the bank for a second, then third, then fourth mortgage etc. each year - so the bank has plenty of opportunity to try to ask for higher interest.

China does not have to unload all its bonds - just enough to disrupt the market.

Bonds are typically sold at auction from the originating bond seller. So the US Treasury puts them out there on auction and whoever buys them gets them.

When a post-sell bondholder wants to sell them they can auction them or sell them to a specific buyer, whichever means they believe will get them the best deal.

That said, this is silly. I believe the PRC holds about 1.2 trillion dollars worth of US Debt. Fine. Good for them.

The amount outstanding is about 15 trillion dollars. Another 5-6 is held by various US governmental organizations but it’s not held by the public. So the PRC dumping ALL of their debt on the market would represent about 8% of outstanding debt. It might cause a small jump in interest rates, though I’d bet it would be smallish.

A far bigger threat to interest rates paid by the treasury is the amount of borrowing we’re doing based on the recent tax ‘reform’ bill that went through along with increased spending. Increasing the amount needed to finance US spending is going to force up rates as the number of buyers who wish to buy debt at low interest rates declines.

Note, also, that the PRC ‘dumping’ US Treasuries will harm our ability to purchase Chinese goods and services. By keeping those bonds from flowing we’d be buying fewer electronics and t-shirts and whatever and there’d be economic pressure to balance out the payments somehow…whether by higher interest rates, a weaker dollar or increased production of such goods either elsewhere or domestically.

Whether those could be good outcomes is really a matter of philosophy, rather than economics. But they’d certainly be events that would cause disruption.

Remember, borrow $100 dollars and the bank owns you. Borrow a trillion and you own the bank.

To maintain a constant amount of U.S. debt China would “roll over” about $200 billion (very rough guesstimate) per year. IOW, their U.S. Treasury holdings would be sharply affected if they simply stopped buying new paper and took the proceeds from old paper as it came due — they wouldn’t actually need to sell any.

There are simpler, more direct ways for China to “punish” the U.S. if that were its intent. Instead it is winding down its huge foreign capital reserve due to the cash needs of its own expansionist policies. If it did target dollar-bond sales specifically (though I don’t think it is) that might be due to an understandable worry about possible dollar weakening. (Trump has mentioned the possibility of U.S. debt default, and has called for loose monetary policy. He has criticized the anti-inflationary policy of the present Fed Chairman. Fed Governors serve long terms so it would be hard to pack the Board with Trumpists in the limited time remaining, but I wouldn’t rule that out with this President.)

Isn’t it then possible that China will use the money raised by dumping its US bonds to buy German or UK bonds instead? The new demand will cause German and UK bond prices to rise, so other investors who were going to buy them will suddenly look at the cheaper US bonds and buy them instead of the German/UK ones. This will create new demand for US bonds and everything will eventually even out.

There may be momentary supply/demand mismatches, but unless someone decides to issue more bonds that they otherwise wouldn’t have or to stop investing in bonds, won’t this simply result in a re-shuffling of ownership?

Thanks everyone, great help.

Just one last question. I only see the US federal budget having to make interest payments on the national debt (interest payments account for about 6% of the whole federal budget, IIRC.) Why hasn’t the US government had to start repaying the principal on Treasury bonds as well by this point, since Treasury bonds issued 20, 30, 40 or 50 years ago must be nearing or reached maturity by now? When does the Day of Reckoning kick in?

They do repay bond principal. Bonds are usually issued for a finite time, not like stocks, which are comparatively open-ended. They repay the principal by borrowing more. It’s an endless cycle.

Most of this was addressed, but I didn’t see anyone addressing the part about giving the money to Russia. Not sure how this would hurt the US…it would essentially be China giving the Russian’s $800 billion. We are already on the hook to pay off the notes China has bought, so whether we pay Russia or China is really no difference to us.

I think it’s an empty threat, basically. Currently the Chinese currency isn’t doing very well, they have a lot of debt issues themselves, and the US bonds, even with the current Administration are in demand and seen as secure. If China wanted to dump them then it would be a short term hit, but we’d still have plenty of buyers (I think the American people are actually the largest holders of US debt in any case, but Japan and several EU countries have substantial holdings as well). It would hurt China more than hurt the US at this stage (IIRC, China has about a trillion in US notes, which certainly sounds like a lot but they are far from owing us).

Pay with what??

The federal government does not have piles of spare money floating around - otherwise it would not be borrowing. It “rolls over” old bonds into new ones.

The basic problem, the running battle in congress since the first shutdowns in the 1990’s, is that the federal government spends around 20% more than it takes in. The majority of that spending is already spoken for… assorted entitlement programs like Medicare that have committed spending; the choice is to tell people “sorry, you don’t get medical treatment, pain is good for you.”

The congresscritters refuse to raise taxes to cover this shortfall - oddly, they just recently went in the opposite direction, adding hundreds of billions to the deficit going forward on the leap of faith that this tax cut money will be plowed back into the economy and result in higher tax income. So there’s no hope in the short run things will change.

China need only offer it’s US bonds to the world, either private deals or auctions. If it sells enough at auction, and a low enough price that the feds must lower their price (i.e. increase interest yield to compete) then they could disrupt the market and raise rates. they may hold only about 8% of the outstanding bonds, but few of those are due each year - so dumping a decent proportion on the market could siphon up the money available to buy the bonds the US would otherwise be selling to cover its yearly shortfall. There’s only so much money available for buying bonds in he world.

OTOH, the Chinese buy US bonds because their factories get paid in US dollars (and Euros, etc.) for the goods they make. The trade these to the Chinese banks, which then have to do something with them - buying US bonds is the simplest safe investment.

Yes, China could sit on cash, if it chose to not collect the interest such cash could earn. If it buys German or British bonds, they it just transfer those dollars to the other country who then has to decide what to do with it - logically, buy US bonds. Ultimately, Americans buy Chinese goods - they pay with dollars, and someone, somewhere, end up with those dollars and has to use them to buy something American - whether an interest-bearing government bond (put off actually spending the money until the bond matures), a share in a US company, or soybeans…

Oh ok thanks. So it’s not something that could be found as an “item” on the federal budget pie chart?

The Federal Reserve Banks can and do buy U.S. Treasury bonds. They bought $900 billion worth from mid-2010 to mid-2011, and another $800 billion during 2013-2014. This was part of the “QE” programs. For “money,” the FRB can simply order the printings of everyone’s favorite portrait of Benjamin Franklin, or just create money electronically.

Those QE activities can be viewed as efforts to keep long-term interest rates low. In normal times, the FRB will let the market determine long-term interest rates. Over the past year the FRB has reduced its vast holding of Treasury debt, but only by about $140 billion. Cite.

Right, China could do a reverse of the ‘operation twist’ by the Fed in recent years. It could sell treasury notes and bonds and transfer the money to short term bills or bank deposits. That would raise US interest rates noticeably though not likely catastrophically. Just because ‘everything would even out’ doesn’t mean rates staying as they were, though it also doesn’t mean the market falling into a bottomless pit. Other investors around the world want those bonds, just maybe a noticeably higher yields.

The thing is though, higher term US$ interest rates would bounce back directly or indirectly against various Chinese entities. The basic conundrum for China contemplating economic warfare v the US by roiling global markets is the way those markets are interconnected and the difficultly escaping blow back. It’s particularly true for USD markets given the dominance of the USD, which has actually increased over the period of rapid growth in China’s as % of the world’s GDP and shallow decline in US % of world GDP. For now anyway it’s true.

The same principal applies in general to the tariff tit for tats, as relates to US actions also.

Well yes, most world leaders - at least those who are economically and otherwise literate - realize that the world market is a seriously interconnected place, and causing difficulties for any on the major economies will have repercussions that are not good for anyone. China needs the USA to buy its goods, the USA needs China to provide cheaper goods than can be made at home, and as an agricultural market and a buyer of high tech like aircraft…

One analysis I read several years ago, probably still highly relevant - said that the party in China has an unspoken bargain with its citizens that emerged after Tien Amen. It will keep them getting richer and improve their lives, and in return, the population will not cause civil unrest. Hence the deep concern over corruption (except for their own families), the frantic way they brought stability back to the local stock market and try to prevent a bubble bursting in real estate, prop up failing old enterprises, and so on. The real manipulation is not so much foreign currencies, as trying to control an internal banking system that seems to display “irrational exuberance”. They do not manipulate their currency to be cheap for the USA, but to make outside goods more expensive so local industries grow and thrive; and to limit any outflow of cash that might also cause a balance of payments deficit. Unlike the USA, they probably could not compensate for an appetite for foreign cars or Russian Vodka by selling treasury bills.

Again, such activities must be carefully controlled. They “print money”, literally and by buying bonds, ie. transferring electronic dollars into the government accounts that they can then spend on assorted projects to make work.

However if they print too much, then inflation results. Money is like any other commodity - if there’s too much, it’s value compared to other "stuff’ goes down, things cost more dollars. If every civil servant and paving worker suddenly has $1000 extra in their pocket, then merchants raise their prices and so on in a vicious cycle… QE worked because the system suffered from the opposite problem - nobody had enough money. Trickling in just the right amount kept the rivers of commerce from drying up, kept people employed but not flush.

:smack: Obviously the willy-nilly printing of money is inflationary. However …

Wrong. The money created by the FRB stays in FRB vaults or is paid out to member banks in financial transactions, e.g. $1000 to Bank X if Bank X delivers a note at that price to the FRB. The money is certainly not “transfer into the government accounts that they can then spend on assorted projects to … make work :smack: .”

It may be best for you to think of the FRB as autonomous and separate from the U.S. government. USG spending authority derives from Congress; the actual funds are held in Treasury accounts. Should those accounts be depleted the FRB would turn the Treasury away as it does with its other customers. AFAIK demand deposits at the FRBs have no “overdraft protection.” :slight_smile: