“They could recall the US debt we have to them.”
That would mean selling the US Treasuries that they hold - which would hurt them much more than us. If they try to sell too much, too fast, their price goes down and they lose value.
If they sold all their holdings, causing a temporary condition where not enough buyers remained for the US Government to finance its debt by selling Treasuries, the Federal Exchange Bank could just buy them all. They already hold several times as much as China. China can hurt the US Treasury market in the short term, but not long term.
US Treasuries serve like their dollar-based checking and savings accounts. They hold them largely because they have to, not to keep a sort of hostage.
They need dollar-based accounts to settle shipments at their ports. We can think of that, along with a few other expenses, like their checking account.
They also need some savings account of foreign reserve (especially dollars) to spend for big ticket items and emergencies - like rescuing their currency or stock markets if they go into crisis.
China is at much greater risk of having to oversell their US Treasuries to meet their expenses, than the US is at risk from China dumping Treasuries as a weapon of sorts.
Good info, thanks.
[US Treasuries serve like their dollar-based checking and savings accounts. They hold them largely because they have to, not to keep a sort of hostage.]
Inertia, and the size of the Chinese market (#2 or #3 in the world for many products) combined with high Chinese tariffs on imports is why they continue to have plants there. Once US tariffs hit 25%, they will probably build plants elsewhere just for the US market. And over time, they will move all of their production not intended for the Chinese market outside of China, because neighboring countries (with the exception of Malaysia, Taiwan, South Korea, Japan and Singapore) and most of Latin America now have lower land and labor costs than China.
Since only 20% of Apple’s sales, but 100% of its production is currently in China, any move by Apple to establish plants outside of China will drop Foxconn’s Apple-related headcount in China by ~80%. That’s a big hit, given that a good chunk of Foxconn’s 1m Chinese employees work on Apple production. Multiply that hundreds of other Fortune 500 US companies, and China is looking at an exodus of millions of export-related jobs. Given that export-related jobs have far better pay packages than purely Chinese domestic industries, the Chinese economy would likely take a serious hit.
A lot of European companies are in the same position. They are 100% in China because of inertia, even though Chinese costs have increased in leaps and bounds over the past 3 decades. In total, dollar-wise, their production volumes in China are probably similar to the US. They, too, will move US-bound production outside of China, and probably production not intended for the Chinese market entirely out of China. So the Chinese are facing a double-whammy.
And I haven’t even included everyone else that also manufactures in China, including Chinese export companies, whose owners have the added incentive of getting their capital out of the clutches of the Party. With 25% tariffs, they now have a genuine excuse to bypass the current Chinese government restrictions on transferring money outside of China that no party honcho can ignore, along the lines of “Let me move my plant to the Philippines, or I will shut my doors, because my net profit is 5%. I can’t eat a 25% tariff. People who make stuff outside of China will eat my lunch on contract bids”.
Great post. The original argument comes from the Glenn Beck school of the scare. Specifically, China will crash our markets with a flood of US dollars. Best rebuttal I have seen online.
China needs the money to sponsor North Korea's activities on the open market.
According to the Wise Honest criminal complaint, it shows that "pls be advised we can only pay in RMB." When Individual-1 objected to payment in RMB, Kwon responded, "We will find someone who can arrange remittance in US dollars."
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I am in total agreement with you.
Our Treasuries really hold them hostage and they know it. They aren’t dumb, they’re scared as hell and holding a lit fuse of dynamite stuck to their hand.
Very few Americans understand how much they need dollar-based accounts.