The research that I did on this for my grad school project with the GAO suggested that there was generally enough liquidity in the secondary bond market to absorb even a mass sale from China over the time period required to do so.

When you say there's enough liquidity, do you mean there's enough for the price not to move at all, or enough that there isn't a temporary overreaction in the price?

Won't let me respond to the comment below this one, but China doesn't determine the volume of the secondary market for UST. It's mostly in New York and in London.

Right but that market's volume changes over time and China gets to choose, with in some limits, when to sell off their bonds. This gives them potentially much more leverage than a static view of the situation might imply.

Yes but they would have to sell it on a secondary market. Those only exist in New York and in London, and what our research found was that the liquidity in those markets was enough to handle a selloff. The short version is that the Chinese are limited by the markets that they are able to sell these instruments, and not vice-versa.

That may be true in the current environment, or in that which you measured in your study, but might be totally different in a struggling economy. Say they decide to have a massive sell of at a strategic moment. Combined with other factors it could have a larger effect. The value of one play matters in checkers but in chess it's the combined value of your moves that win the game.

>Say they decide to have a massive sell of at a strategic moment.

You can't sell into a vacuum. Hence, if they are "selling-off" at a strategic time, then there is someone "buying up" at the same strategic time.

A struggling economy is when demand for U.S. Treasuries is the highest, because people flee to safety in troubled times, and financial instruments don't get much safer than U.S. Treasuries. There would be no shortage of buyers if China decided to sell off in a struggling economy.

China chose to put their own wealth into U.S. Treasuries, and therefore China will do everything it can to ensure that it can extract at least that much wealth out of U.S. Treasuries. They don't have a $1 trillion of free money that they can burn up just to hurt the U.S. by selling low. They need that money back!

The amount of U.S. debt held by China is often viewed as a negative thing, but it actually does a lot to stabilize our relationship with them. They want us to succeed financially, so that they can get their money paid back, and so that they have a place to sell the products they make.

Strong economic ties are the major reason we do not have a Cold War with China the way we did with Russia. Neither country wants to change that.

Edit to add: This is why there is so much U.S. reporting on China's economy. Not because Americans want it to fail, but because Americans want it to succeed, and have concerns.

Fed can buy all the bonds it feels like so there is no way to 'flood' the market with T-Bills. Net result would be China selling off it's reserves at a huge discount which would be good for the US.

Last time I looked, the daily trading volume of U.S. Treasuries was about $1 trillion.

"US treasuries are at historically low rates -- if China dumped 'em all it probably wouldn't move the needle that much."

Rates (i.e. yield) and price have an inverse relationship. If China were to sell their bonds, this should reduce the price of bonds (i.e. increase their yield). So, regardless of what we think about the likelihood of this happening, or the magnitude of the impact, 'historically low rates' do not provide any backstop.

Historically low rates means people are buying up us bonds even at crap returns. If China dumped us bonds and depressed the price, it would only make the value proposition that much better for the current bond investors so they would gobble them up and push the price right back up.

> And the reason they hold so many is not as some control play against the US -- its because it was the best way to devalue their currency enough to support exports.

Can you explain how that devalues a currency? Isn't a simpler explanation that the reason they hold so many is because US government bonds were and still are the safest way to invest your money?

China exports a lot to the US, and exporters get paid in dollars. To use that money in China, they need to exchange it, increasing demand for yuan. There aren't enough imports into China to counterbalance this. Buying treasury bonds instead means they don't need to exchange the money and can keep on exporting. It also happens to be a very safe investment.

You could worry that someday the Chinese might want to cash in on this investment, but increasing US exports to China isn't actually a problem. Increased demand for US exports would improve the US economy.

People like to try to figure out which side is exploiting the other, but both sides are largely getting what they want out of this deal.

To buy US bonds you need dollars to pay for them. So you have to buy dollars, paying with your own currency. Which changes the exchange ratio in favor of dollar by means of the supply/demand law. That's how buying bonds devalues juan.

Sure...we would just print more money and pay them back.

QE programs have been propping up Wall Street for years now, and it would be just more of the same.

No need, there are so many others looking for yield who would buy the bonds.

How it looks depends a lot on your bias. The fact remains that China can soak up $1T of US liquidity.

Yes, they 'can' soak up $1T of liquidity the way I 'can' lock myself into my house and set it on fire. Common sense suggests they will never actually do so.

I'm not very familiar with this issue but could you please explain how China can soak up $1T of LIQUIDITY when most of this $1T is, as I understand it, in bonds. Wouldn't this debt being in bonds mean that 1) there is a schedule of payments that have already been accounted for in the budget and 2) that they cannot "call in" the debt?

Certainly China could refuse to buy additional bonds that we put out which may impact liquidity but there are always buyers for US debt - Japan was the largest foreign holder of US debt just last year.

China can sell US bonds to buyers for slightly less than the US government. This would actually create more liquidity in the US bond market but effectively reduce the US government's ability to finance more debt. The US government would have to sell bonds even cheaper to finance more debt. Whether this would have a big effect would depend on a lot of other factors but it's a significant playing card in the Chinese hand.

Replied above, but the secondary bond market is liquid enough to absorb this event over the time period required.

$1T is a joke for US economy. The fed pumped how many more than that with QE programs?