How does this work?

In February 2018, China owned \$1.18 trillion of U.S. debt. It's the largest foreign holder of U.S. Treasury securities. The second largest holder is Japan at \$1.06 trillion. Both Japan and China want to keep the value of the dollar higher than the value of their currencies. That helps keep their exports affordable for the United States, which helps their economies grow. That's why, despite China's occasional threats to sell its holdings, both countries are happy to be America's biggest foreign bankers. China replaced the United Kingdom as the second largest foreign holder on May 31, 2007. That's when it increased its holdings to \$699 billion, outpacing the United Kingdom's $640 billion.

Source: Article - Who Owns US National Debt

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    $\begingroup$ SE uses something called "MathJax" that allows users to write things in Math format. For instance, it turns x^2 into $x^2$. It uses dollar signs as markers for the beginning and end of what to turn into math formatting. So if you have two dollar signs in your question, that can fool the system into thinking you want it in MathJax. $\endgroup$ – Acccumulation May 22 '18 at 16:06
  • $\begingroup$ If there is high demand to hold something, its price will be higher than if there is low demand to hold that thing. If what you have to trade (USD) is worth more, then you can get more with it. $\endgroup$ – nathanwww Jun 21 '18 at 22:23
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    $\begingroup$ No doubt holding a trillion in US treasuries will have a favourable impact on exports to the US due to exchange rate effects. But it's not like there's many places to park a trillion dollars. Which alternative financial holding would you recommend to the central bank of China instead of the USD? For example, if they were to commit to slowly sell 100 billion USD over 12 months, where else should they put it? $\endgroup$ – nathanwww Jun 21 '18 at 22:31

Suppose a camera is made in Japan and sold in the US. If the maker of the camera wants 10k Yen for it, and the ultimate buyer is paying dollars, then somewhere along the line, dollars have to be exchanged for dollars. For instance, the company that imports the camera might go out and buy 10k Yen, then give the Yen to the company that made the camera. They then pass on the cost of buying the Yen to the camera store, who passes it on to the customer. The dollar being strong with respect to the Yen means that one dollar can buy a lot of Yen. So that means that it doesn't cost very much dollars to buy the 10k Yen, which means that the camera store in the US can sell the camera for fewer dollars, which means that people are more willing to buy the camera, which means that the camera manufacturer gets more business.

You're also asking how the strength of the dollar is affected. It's a matter of supply and demand: every time Americans buy stuff from other countries, they are supplying dollars, and every time they sell things to other countries, they are demanding dollars. The strength of the dollar depends heavily then on how much the US exports (which strengthens the dollar) versus imports (which weakens the dollar). Since transactions between the US and other countries involve trading goods and dollars, the effect on the dollar is opposite of how the goods are moving from the US perspective: when someone in the US sells a good, that can be viewed as "buying" dollars, and the US buying goods can be viewed as "selling" dollars. A strong (or "expensive") dollar means that US goods are also expensive, but foreign goods are cheap, and a weak dollar means that US goods are cheap, but foreign goods are expensive.

Companies that facilitate exports generally benefit from a weaker dollar (the goods are cheap, so it's easier to sell them). This includes export companies, and people who work in industries whose markets are largely overseas. Companies that facilitate imports generally benefit from a stronger dollar. This includes import companies, and companies that that sell a lot of foreign-sourced goods, which in the camera example would include the camera store.

Bonds aren't generally included when calculating exports, but they do have largely the same effect: US treasury bonds are denominated in dollars, so if people in other countries want to buy them, they have to buy dollars, which drives up the value of the dollar. You can think of it in terms of analogy with a household: exports are like people going out and working for a paycheck, while imports are like buying stuff. A bond is like getting a loan, such as a mortgage or a car loan. The more money someone makes at their job, and the more loans they get, the more the cash they have to spend. A dealership wants to help someone get a car loan, because that makes it easier to but a car. Similarly, China and Japan want the US to be able to sell their bonds, because that makes it easier to buy stuff from China and Japan. Whenever China or Japan buy a treasury bond, they give more money to the US, and the US then uses that money to buy stuff. If China were to sell off their bonds, that would make it harder for the US to sell new bonds, which would make it harder for Americans to buy stuff from China.

  • $\begingroup$ Thank you very much for your response. 1. So the more Yen you can buy with 1 dollar - the better it is for the US store? (since it can sell cameras for fewer dollars). 2. How exactly Bondholding plays a role and what role does it play in this? Scenario 1 - Japan does not hold US Bonds b) Scenario 2 - Japan holds US Bonds. a) What is the difference? I guess I am just trying to figure out the mechanism - the effect of US Bond Holding by foreign country as a way to keep their exports affordable. $\endgroup$ – Alexey Shevelyov May 22 '18 at 15:57

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