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What is the reason that China buys so much US debt in form of Treasuries? How does this help the Chinese economy? It seems they are willing to give money to USA so USA economy can function better (more cash more investing in infrastructure).

What is in it for China, holding a bunch of paper yielding next to nothing?

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  • $\begingroup$ One explanation is that Chinese government concerns more about risk than expected yielding $\endgroup$ May 6 '15 at 18:35
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    $\begingroup$ One reason a country might buy another's debt is to affect the exchange rate— buying Treasuries strengthens the U.S. Dollar relative to the Yuan, making Chinese exports relatively more attractive in the U.S. $\endgroup$ May 6 '15 at 19:52
  • $\begingroup$ @dismalscience: But then the question is why lower price of RMB relative to US Dollar, exporting more and importing less, is in China's interest, right? $\endgroup$ May 7 '15 at 7:51
  • $\begingroup$ Yes...basically with all the money that China makes through US exports, it can probably improve the lives of its citizens, rather than buying US debt. That is my confusion, why does China use the money to buy US debt as opposed to building roads and lifting itself out of poverty? $\endgroup$
    – Victor123
    May 7 '15 at 14:45
  • $\begingroup$ Your question is legitimate, see Gary Becker's blog: becker-posner-blog.com/2009/11/… $\endgroup$ May 8 '15 at 8:50
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As was said above, buying debt to affect the exchange rate and make Chinese exports more attractive may be one reason to buy these Treasuries. Surely all of these are not reinvested into buying more debt and some of it is put into other civic projects.

The other reason to buy debt is to have a string of payments over time that may become more valuable later on. Since the US is a large nation and powerful nation, China probably feels it is very unlikely that the USA will default, and if they did, that would give China a legitimate complaint against the US, that might help them in foreign relations. It may even be that they want the US to be stable so as not to crash the global economy and so that they can still sell lots of products to the US, so they buy up the debt to keep the USA stable.

The more important part of that whole paragraph though is to have a string of payments. For the same reason that governments like to hold debt even when they have the ability to pay it off, China might find that investing into debt will provide a better rate of return than infrastructure at the moment, and later on, once infrastructure has a better rate of return (capital steady state changes) then they can take a stream of income from interest payments from the US and taxes and then invest into that.

Finally, I couldn't help but notice that you see China as needing to lift itself out of poverty. That may be true, but why would investments into infrastructure be the solution to helping the rural poor--places that don't need as much infrstructure? Most of the poor in China are in rural areas, so there's something to think about.

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Similar to previous answers but with some additional sources (and possibly simpler?)

By investing abroad dollars(or any other currency) are purchased in exchange for Yuan, this reduces the value of the yuan and drives up the value of the dollar, supply and demand. This keeps the exchange rate favorable for exporting from China.

The same effect is achieved by investing in any foreign assets, from bonds to housing or infrastructure. The Chinese populus do this a lot too which increases the situation

A little source to back me up.

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China's interior consumption only represents 30% of its GDP, it's economical growth is not based on its interior consumption but on its exportation, a big part of its consumers are the USA. China has a huge commercial surplus due to the fact that it exports way more than it imports and its main consumers are the USA, with this surplus China chooses to buy US debt to maintain their current consumption and thus maintaining its current economical situation.

Sorry if this is not really comprehensible I am studying in french and it's hard to get the right terms in english.

Edit : Here are some stats on which this theory is based http://www.worldstopexports.com/chinas-top-import-partners/

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  • $\begingroup$ Would not investing the money in its own infrastructure improve the economy? AS opposed to buying US debt? $\endgroup$
    – Victor123
    May 26 '15 at 13:19
  • $\begingroup$ On short term basis yes but not on long term, if China stops buying US debt it will cause a remarquable drop of consumption and China's exports will drop so for long term benefits it has to keep US's consumption at the same level because their loss would be more drastic if they decide to stop buying. $\endgroup$ May 26 '15 at 13:32
  • $\begingroup$ Note that China's economical growth was never based on its interior consumption and relied mostly on exports. $\endgroup$ May 26 '15 at 13:33
  • $\begingroup$ Note that lowering your change rate against the dollar has impact on nearly all other currencies, so the effect is not limited to USA export but realy impacts pretty much all exports - this is what's so special about the dollar. $\endgroup$
    – VicAche
    May 26 '15 at 14:43
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    $\begingroup$ @JoaoBotelho this is because I built this answer out of general knowledge in the US and Chinese economy, but you can check the exact quantity with a quick search but here are some stats worldstopexports.com/chinas-top-import-partners where you can see that the USA consists of 18% of China's importers $\endgroup$ Aug 21 '17 at 23:56
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It's not that they WANT to have US debt (I'm sure they would rather have a pile of gold), but they have no choice. Where else are they going to put the money? They have enormous trade surpluses with the US and the rest of the world. This means they have excessive amounts of dollars in their accounts. They cannot use dollars in China, because that is not the currency of China. They can print their own renminbi if they want to spend money in China.

US dollars are useful to them only internationally. And there are limits on their ability to use it. If they buy commodities too aggresively, they will push prices up and cause a global economic crisis, so they can't spend it all on commodities. They can't spend (much) on manufactured imports either because that would hurt their own manufacturers, which leaves them with few options. Actual foreign direct investment in foreign countries (such as BRI) is fraught with geopolitical risk and political impediments, not to mention moving at the pace of a tortoise.

So they are stuck holding treasuries. Why US treasuries instead of euro-denominated or yen-denominated bonds? Because US dollars are still the dominant global currency and are accepted for the settlement of commodity trades like oil. It's also what they receive (mosty dollars) from trade. Sure, they could convert another currency like yen to dollars, but they would incur transaction costs and there are currency exchange risks. It doesn't make sense to go from the dollars they already own to yen and then back to dollars in order to trade.

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  • $\begingroup$ Your answer could be improved with additional supporting information. Please edit to add further details, such as citations or documentation, so that others can confirm that your answer is correct. You can find more information on how to write good answers in the help center. $\endgroup$
    – Community Bot
    Sep 24 at 4:11

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