Presumably, China would also sells its dollar reserves (twice as much as the bonds, roughly, if I’m not mistaken). It would be non-sentical to sell US bonds to stockpile US dollars instead. Whether the motive is deliberatly hurting US economy or China having a sudden complete lack of confidence in the USA’s future.
It’s a 3.5 trillion dollar “data point”.
I don’t see how there’s any question about this. The markets could easily handle another 1.2 trillion from China. We can see this because the US Federal Reserve, by itself, has swallowed three times as much. Or put it another way: US debt held by the public was 5.3 trillion in 2008. Now it stands at over 12.5 trillion. Federal deficits have increased this outstanding debt by more than 7 trillion over the last 7 years, or approximately one trillion a year since 2008. I’m not sure whether you’d consider that one “data point” or seven, but I don’t see how it matters. Hypothetical China couldn’t possibly dump more debt into the markets than the US government has personally done, because they don’t own enough. Even when we consider that 3.5 trillion of that 7 now sits at the US Federal Reserve, we’re still looking at an increase of half a trillion a year. Hypothetical China is simply not in the same league, since they have one and only chance to dump their holdings and the size is simply not any bigger than what the US government can do, and has done.
There were people claiming that these deficits would explode interest rates. They were wrong. Prices of Treasuries are generally higher than they were before the massive dumping of bonds. (I recommend looking at the 10yr to see this best.)
The supply of Treasuries has massively increased, but the price is higher. It didn’t drop with the increase in supply. It did the opposite. Why? Because we’re not talking about a market in isolation. This is the macroeconomic world, where everything connects to everything else. We can’t assume that the price will always decrease massively with a massive increase in supply, because we can’t assume the rest of the world is passive and unchanging. Ceteris is never paribus in macro. A big part of the demand for Treasuries is “fundamentals”, and the key quality of Treasuries is safety which means those fundamentals stay strong despite the increase in supply (or perhaps because of the increase in supply – at the highest levels, supply and demand might be interlinked in ways that we cannot untangle).
A sudden China dumping would definitely lower the price, but not by much, and the long-term effect would be negligible because it would be out-shadowed by everything else in the ever-changing world.
It wouldn’t change anything. Treasuries are fungible, and the market is liquid and worldwide.
It doesn’t matter whether the Fed buys debt from inside the US or outside. It doesn’t matter if the elephant drinks from the north side of the pond, or the south side. Where it drinks from won’t change the final level of the water.
Sure, that’s a fine analogy.
So the US has conjured up 3.5 trillion more dollars out of nowhere, and what’s happened to inflation? It’s around two percent, lower than it was for most of the 80s and 90s. That’s more data that shows that the dollar markets can absorb huge amounts of assets without causing large ripples.
The F.R.B. already owns much more Treasury debt than China does. Yes, it effectively prints dollars to buy the debt, hoping for an investment boom with associated inflation which has, unfortunately, only barely materialized.
The U.S. has been begging China to lower the dollar/renminbi ratio. It sounds like you’ve found a way for China to work toward that U.S. goal. 
And you still ignore that the dollars China acquires when it sells its bonds have to go somewhere. They’ll end up, whether directly or circuitously, buying U.S. assets (including bonds) and thereby putting downward pressure on U.S. interest rates. The net result of the buying and selling would probably be higher bond yields than before, but only slightly so, I’ll guess.
Yeah, upthread, clairobscur, you refer to China as the largest bond holder. But that’s really untrue. China, at $1.3T, holds about 6-7% of outstanding US debt. That makes them the biggest FOREIGN bond holder - though Japan is close - but that’s really a small percentage of overall debt.
Let’s work out the math, then.
At current bond rates, in a directly competitive environment - which we aren’t really dealing with but let’s posit it - and current 10-year rates (to make it worst-case, pretty much).
Indebtedness to China: $1,300,000,000,000
Current interest rate: 2.3%
Times 10 years: $299B (I’m not typing a millions zeroes. Sue me.)
Return at maturity: $1.599T
Actual Interest Rate: 2.3%
Well and good.
Say China discounts at 50% - their balance sheet can’t support it but you seem wed to the idea -
Discounted Indebtedness to China: $650B
Current Interest Rate: 2.3%
Times 10 Years: $299B
Return at Maturity: $1.599T
Actual interest rate: 4.6%
Above simplified but that’s the basics. Others can correct if I wandered too far off course on a Saturday morning.
Can you see the difference? While China took less on its investment - and fundamentally made itself poorer - the investor who bought the debt made out pretty well. And the US had to double rates to cover that with the next 10-year debt auction in the worst case. So 10-year rates - using your own scenario - will still be lower than historical numbers.
1/90 7.94%
1/95 7.88%
1/00 6.58%
1/05 4.23%
And there we go. As recently as January of 2005 there was an equivalent rate. And that rate was higher all through the go-go 90s and through the dot-com recession.
China won’t dump its bonds even if it hates us. It would damage their economy immeasurably and inconvenience the US economy. And that’s only if the rest of the world doesn’t see it as a one-time boon and continues buying US debt at prevailing rates.
Just out of curiosity, is that 4.6% at the end of 10 years, or 4.6% per year over 10 years? Cause I would definitely buy a piece of the latter.