Question

1-China owes approximately 26.6% of US debt yet they allowed to buy treasury bonds.what kind of impact would this be on the US economy and foreign policy?

Answer 1

China has bought treasury bonds, despite holding approximately 26.6% of US debt. This is because of the fact that China has earned substantial amount of U.S. dollars through its stellar exports and it wanted to park these earnings into safe investments. U.S. treasury bonds are one of the safest investment avenues and hence China has bought treasury bonds.

There is an economic rationale as well as foreign policy implication behind allowing China to buy U.S. treasury bonds. Firstly in terms of economic rationale if China reduces their holdings then the dollar will go on a downward spiral as other countries will also follow suit and reduce their exposure to U.S. Thus China was allowed to buy treasury bonds to prevent a possible rout in the bond market. Secondly in terms of foreign policy implications a reduction of U.S. debt holdings can be used by China as a political weapon against the recent tariff proposals that have been issued by the Trump administration.