China is currently the second largest holder of U.S. national debt ($749 billion in Treasury bonds) by a foreign nation. China invests that money in U.S. bonds to help keep its export prices low. It focuses on export-led growth to help generate local jobs.
With billions of U.S. dollars, China has found the U.S. Treasury securities to offer the safest investment destination for the Chinese Forex (where banks, businesses, governments, and investors buy and sell currencies) reserves. It receives dollars from Chinese companies (exporters) that accept dollars as payments for their exports. These exporters require yuans to pay their workers, so they sell the dollars to the People's Bank of China (PBoC) for the needed yuans. This increases the amount of dollars available to buy more bonds and increases the value of the yuan which can be spent on China's military.
The PBoC actively intervenes to prevent a dollar to yuan imbalance in local markets. It buys the excess dollars from the exporters and gives them the required yuans. The PBoC can print yuans if more are needed. Effectively, this intervention by the PBOC creates a scarcity of U.S. dollars, which keeps the dollar rates higher.
As a result of China (and other countries such as Japan or the U.K) purchasing Treasury bonds, the U.S. federal government must send dollars abroad (to honor the interest until the debt matures at which time the debt amount must be honored).
The Treasury bonds held by China is unknown, so I based this example daily interest payment upon ten-year bonds, whose yield is currently 4.486 percent. A $749 billion amount yields an annual (rounded) interest amount of $33,6 billion, or $92.055 million of interest per day.
The U.S. sends $92,055 million per day to Communist China.
So what?
President Trump posted on 'X': "China is a massive [trade] surplus. That they take and they spend on their military. We don't want that. I don't want them to take $500 billion, $600 billion a year and spend it on their military. I don't want them spending money on their military. We shouldn't have to spend that either."
Okay, Trump exaggerated a bit. China can't put its hands on the entire trade surplus amount all at once. But China can (and does) put its hands on the daily interest and spend that amount on its military. Trump, however, is the only president who has taken on the trade deficit debt lately. The only avenue of retaliation open to Trump is to reduce the total debt amount through the imposition of tariffs. He can't stop subsidies or currency value manipulation.
Trump treats this tariff situation like a game of Monopoly, views countries as properties to control, trade, and/or leverage to outmaneuver rivals such as China. There are no permanent friendships rooted in shared values, no permanent enemies defined by ideology. Every foreign leader is simply another player vying to dominate the board. China (and the rest of the world) is learning that fact.
The U.S. has shot itself in the foot by running up the massive trade deficit debt of which China has (for the past twenty-five years) taken advantage. China's ability to purchase Treasury bonds helps keep U.S. interest rates low. That allows the U.S. Treasury to borrow more at low rates. Congress can thus increase borrowing for more federal spending. See a pattern here?
Regarding the massive debt caused by China's trade surplus, China's strategy is to maintain export-led growth, which aids in generating jobs and enables it, through continued growth, to keep its large population productively engaged (and fed). Since this strategy is dependent on exports, China requires the yuan to continue to have a relatively lower value than the dollar and thus offer cheaper prices.
International trading that involves two currencies has a self-correcting mechanism. For example, China, currently running a trade surplus with the U.S., is sending goods to the U.S. and is getting paid in U.S. dollars. There is consequently a huge supply of dollars being held by China, which causes the dollar's value to depreciate against the yuan. This depreciation of the dollar, however, will eventually make U.S. exports cheaper and imports from China more expensive. Gradually, the U.S. will start exporting more and importing less, due to its lower-valued currency. This will ultimately reverse the current trading scenario. This is the self-correcting mechanism occurs in the international trade markets regularly, with little or no intervention from any authority.
The "problem" is that this correction typically takes years, a luxury Trump doesn't have. Key word: gradually. However, Trump has wide latitude (except with Democrats and the MSM) to act in ways that were once inconceivable. His anti-China rhetoric could grant him the public credibility required to broker a broad and enduring deal.
China wants to keep its exported goods competitively priced in the U.S. market. That cannot happen if the yuan appreciates in value. China thus keeps the yuan's value low compared to the dollar by using the intervention mechanism described above. However, this action leads to a huge pileup of dollars as forex reserves for China.
China also manipulates the value of the yuan to keep its value low.
China owns the trade deficit amount and expects the U.S. to pay the interest and principal when due (unless the U.S. defaults on its loan payments, which isn't likely). Speaking of loan payment defaults, China is currently in default on its sovereign debt held by American bondholders. "Lest anyone wonder about the age of these bonds, it is irrelevant. What matters is that this is a sovereign obligation."
Kinda tells us who we're up against.
Again, regarding China's massive trade surplus, what's done is done. A 2024 Pew survey showed that 81 percent of Americans viewed China unfavorably, with 42 percent perceiving it as an enemy of the U.S. The U.S. attitude toward China was cemented in 2012, when both presidential candidates Barack Obama and Mitt Romney, while courting swing voters in Ohio. blamed China for U.S. job losses.
Both the U.S. and China have become disillusioned with each other, yet the United States has some advantages that China lacks. The domestic resources of the U.S. and its friendly neighbors make it more likely to overcome its challenges, while China faces a steeper climb due to resource constraints and volatile relationships with its neighbors.
Additionally, economically, the gap between U.S.'s and China's per capita gross domestic product (GDP) has widened since the end of the COVID-19 pandemic.
All these developments mean that the U.S. and Donald Trump can negotiate with China from a position of relative strength.
Image: AT via Magic Studio
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