China Buys Treasury Debt

China, meaning China’s central bank — the People’s Bank of China — started buying Treasury IOU’s again in March. It purchased $36 billion worth. It now holds over $1.2 trillion in Treasury IOU’s.

China has now leaped ahead of Japan as the #1 foreign holder of U.S. government debt. Add Hong Kong to this: another $180 billion. The statistics are here.

A few mid-level PBOC officials have talked tough for two years. “We’re through with the U.S. dollar!” Great rhetoric. But when push came to shove, the government buckled. So did the People’s Bank of China.

The PBOC buys dollars in order to raise the dollar-yuan exchange rate. This subsidizes Chinese exports to the USA. Americans can buy yuan cheaper. Then we can buy more goods: “Made in China.”

Meanwhile, the U.S. Treasury sells its debt to the Chinese central bank. “Suckers!” This debt will never be paid off.

The Chinese central bank gets IOU’s that pay almost zero interest. This helps the Federal Reserve keep interest rates low. In the meantime, we Americans get to buy Chinese goods cheaper than would otherwise have been the case.

There is all sorts of chatter in hard-money circles about China’s central bank trying to create a new currency with Russia. This assumes that China is abandoning the dollar as its primary reserve currency. But China is not abandoning the dollar. It is increasing its holdings.

China’s government is mercantilistic. That is to say, it is economically insane. The Communist apparatchiks think that China’s urban masses can be kept quiet by having the PBOC create yuan out of nothing — fiat money inflation — so that the PBOC can buy IOU’s from the U.S. Treasury that pay almost no interest. Then Americans can buy Chinese-made goods that could otherwise have been sold to the Chinese people.

In short, the Communists are subsidizing American consumers (cheap goods) and American politicians (low interest rates/more debt). The Chinese masses are paying for this: reduced wealth. Americans get this wealth.

Communist politics + mercantilist economics = stupidity.

It won’t go on forever. Enjoy it while you can.

Note: I devote an entire department to this mercantilist stupidity. You can access it here.