Why doesn't the US buy lots of Chinese debt? by mattsteinglass
June 14, 2010, 8:21 am
Filed under: China, Economics, US

Speaking of US-China competitiveness, Paul Krugman has been on a tear over the past week arguing that the US has to put some muscle behind its demands for China to stop undervaluing the yuan. The other day Krugman addressed China’s allegations that imposing countervailing tariffs to retaliate for Chinese currency manipulation would violate WTO rules. And indeed it isn’t really clear whether WTO and IMF rules consider currency manipulation to be a trade subsidy, so it’s not clear whether the US has a case on those grounds.

But here’s my question: if it’s not a violation of WTO rules to manipulate your own currency, why doesn’t the US simply do exactly the same thing China is doing? Why don’t we purchase a countervailing quantity of Chinese government debt to compensate for the US government debt China buys in order to keep the yuan low? Is it because the US government, unlike the Chinese government, lacks the spare cash to buy up foreign debt? If so, couldn’t the Fed do this as an open-market operation? Or is it because the Chinese State Bank controls sales of government bonds and would stop us from buying up Chinese debt via administrative measures? Or does Chinese government debt simply not trade openly? Or what?

4 Comments so far
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It’s something of a smart idea, although I wonder how much Chinese sovereign debt is being accumulated. If the(ir) government is buying up reserve currency the I wouldn’t think much.

Comment by citifieddoug

I think China has actually run up a fair amount of debt over the past year or so in the course of its very substantial stimulus policies (on the order of 13% of GDP if I recall correctly). The money was mainly spent by subsidizing loans from state-owned banks. They accumulate lots of US debt at the same time because all the dollars that come into the country to buy exports have to be exchanged for yuan via the State Bank, which then uses many of those dollars to buy US Treasury bills in order to keep the yuan from rising. But the CIA says their public debt was 18.2% of GDP in 2009, which would be about $850 billion of a $4.8 trillion economy in nominal (official exchange-rate) terms. I would imagine you wouldn’t need to buy more than a few hundred billion dollars of that before the needles started to move, no?

Comment by Matt Steinglass

Plus, with your FOMC twist, there’s the added benefit of simultaneously devaluing dollars while pushing up the Yuan. I don’t know why this wouldn’t be smart as long as the Chinese aren’t too sensitive about economic sovereignty.

Comment by citifieddoug

Yeah…that “too sensitive about economic sovereignty” point would probably mean you couldn’t actually do this. If their government bonds are mainly held by Chinese investors (banks etc.) I imagine they can order them not to sell. I’m not clear on how much of China’s debt is held by foreigners — the CIA lists an “external debt” figure of some $400 billion but that’s both public and private, and seems confusing to relate to the government debt.

Sometimes it’s hard to remember why it’s better to have an open economy. Of course it sucks for the Chinese workers who’re losing part of the value of every yuan they earn.

Comment by Matt Steinglass

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