It's also a huge bargaining chip. If China dumped a trillion dollars of US financial instruments at firesale prices over the course of a year, that would cause a lot of mayhem.
I mean they suddenly decide that the asset they bought in trillions as safest investment available around is suddenly worthless - and not only try to hide it, but actually loudly proclaim that all their holding are worthless (I imagine so that it would be easier to sell them at the best price?) I don't see China doing something like that. First, they would need to find a reason why US debt has become worse investment than yesterday - and second, even if they find this reason, they won't ever "drop it like hot potato" - that would be a suicide (in Chinese conditions, probably a literal one for somebody that would cause such loss of billions to the state).
> If China dumped a trillion dollars of US financial instruments at firesale prices over the course of a year, that would cause a lot of mayhem.
Why would they? Other than collective insanity, there'd be no reason for such behavior.
What? How would telling the world that US debt is worthless help them sell their holdings of US debt at higher prices?
Economic warfare.
Itβs like buying a car from a friend then turning around and selling it for a dollar.
You hurt yourself more than you hurt the other person.
Given that, I'm not really sure that Japan is a good example. The US, as well, is in a weird space. China has been quite keen to buy up US debt. This is propping up the US dollar, which I think is an important strategy for Chinese growth. However, I expect the other shoe to drop at some point. Once the Chinese economy is strong enough that they don't want to be the "cheap manufacturing country for the world" (see Japan and South Korea for other examples of this), I suspect they will drop US debt like a hot potato, favouring strong buying power over strong selling power. If the shift their economy and compete head to head with the US in the "value add" sector, I think that debt may cause significant problems.
But this is complicated stuff and I really don't know what I'm talking about :-) It's fun to speculate, though.