What is debt? In general, debt is obligation that is needed to be repaid in the broadest sense of the word, but it does not exactly require a monetary value as it is referred to most of the time. It can be paid in the form of favors or other reciprocative gestures that may give rise to opportunities for both the creditor and the debtor. A interesting analogy would that be of the debt that the United States owes to China totaling to the amount of $1.268 trillion dollars which was incurred by the U.S. in the past 3 years. As of August, 2013, China presently owns 23% of the all the foreign debts that the United States owes other foreign countries, taking into account a total of $5.59 trillion dollars which America owes other countries. For the last 3 years now, China has been holding on to more than $1 trillion dollars of U.S. Debt, acquired by the Chinese government through buying and selling of Treasury notes from the American government.
So, how did the United States end up being indebted to China in the first place? As it turns out, China was more than willing to buy into a large part of the U.S. Debt. China’s opportunity to buy into U.S. Treasury notes strengthens it’s economic growth by keeping the Chinese yuan slightly weaker than the dollar which keeps Chinese products that are exported to the U.S. Market cheaper and more competitive than the products made in the United States, creating more jobs for the Chinese economy. It does come as a surprise on why the United States had allowed China to buy 23% of it’s foreign debt. The reason was on how Chinese products were priced lower than American made products as the American people were very easily enticed by low consumer products.
The United States sold it’s debt to China for reasons of economic growth, enabling it to fund their federal government programs which also keeps U.S. Interest rates low and manageable. Despite of the obvious economic advantages that is being beneficial to both countries, it seems that China is now emerging as a strong world economy, tipping the balance of economic power to it’s own advantage. What can China possibly gain from this? China tries to control the strength of it’s currency, the yuan, so that it is slightly weaker than the dollar. Part of China’s economic strategy is to keep it’s export prices lower which gives it a more competitive edge over other manufacturing and exporting countries. It can do this by controlling their currency at a fixed rate compared to other international currencies that fluctuate along with the world economy.
It has been the general practice of Chinese business people to buy more when the prices are low and they had been doing these for hundreds of years even before the time of the emergence of the Western economies. When the trading price of the dollar falls, that is the time that the Chinese government uses some of it’s extra accumulated dollars to buy treasury notes, which in effect, increases the demand for the U.S. Dollar, thus increasing it’s value. Added to that, in conjunction with China’s agreement with the U.S. Government, China will redeem U.S. Dollars for their yuan with a fixed rate. With this precept, a country like China must have a vast supply of American dollars to be able to achieve such a feat.
China owes their economic growth for being a good accountant, and how to become an accountant means understanding the principle of how debt, in this case, how foreign debt can work in favor for your country’s economy. You may say that China has now become America’s biggest creditor, which gives China an obvious political and financial leverage apart from the rest of the world as it holds America’s debt in it’s hands. China has even given some suggestive inclinations of selling part of it’s debt holdings which can trigger a rise of the interest rates that will slow down the economic growth of the United States. The frequent fluctuations of the U.S. Dollar also affects the debt that China holds over the U.S. Economy as it can raise or lower the value of the treasury notes that it has bought.
China will not sell off all of America’s debt as it knows that it will also affect their ow economy as well. This sort ODF actuation will lower the demand for the U.S. Dollar and will cause a global financial crisis much worst than the recent 2008 financial collapse, which not only will affect China and the United States, but the whole world as well. China’s ability to hold the United States in regards to it’s debt is working so well that it has resulted in an annual 10% growth for the past 3 years. In fact, it is now the 3rd largest economy in the world trailing behind the United States and the European Union. China is now the worlds largest exporter in the world to date and despite a low per capita income of only $9,100 dollars a year per person compared to that of $ 49,000 dollars a year for a person working in the United States. This low salary standard attracts foreign manufacturers to China, allowing these manufacturers to pay lower salary rates that optimizes production and profit.