How does China own our debt or loan that they can collect anytime on?

I was under the understanding that they own a large portion of our debt. And that China can call in on this note?





Thanks you guys for your time and patience. The media doesn't quite give me the whole picture.

How does China own our debt or loan that they can collect anytime on?
Anybody or any government can buy US government debt, of which there are four kinds, depending on the length of maturity and whether or not they pay period interest. One will buy the note at some amount less than the face value, which ranges from very little to huge sums. These notes then can be bought or sold on the open market. The amount one pays is determined by many factors, such as the strength of the US economy, its trade deficits and surpluses, many things like that. The less confident people are on getting repaid, the less they have to pay for some determined figure that will be paid when the loan matures.





What one cannot do is demand payment from the government before maturity. If the loan pays interest (typically only on longer terms debt, 10 to 30 years) the owner collects it periodically, otherwise the owner will just get the face value at the maturity.





China has invested lots of its American cash that it gets from trading with the US. Since we buy more from them than we sell them, they have a surplus of dollars, which they then use to buy government debt. They get periodic interest from those bills, but they only get the money back at the end of the life of the note, unless they choose not to collect it. That is the key point. One can choose to forego getting their money and still continue to collect interest on it. Those are the only notes a person or government can demand payment for.
Reply:Governments raise money by issuing bonds. These work like I.O.U.'s.





The bond is for a certain amount of money - say $1000, and will pay out interest at a particular rate, - say 4%.


The bond also has an expiry date - though this may be a few years into the future or a great many years into the future.





Every year the government pays the interest from the bond to the holder of the bond. (e.g. 4% of $1000)





When the bond expires, the government pays the full amount (the $1000) to the holder of the bond.





These can be safe reliable long term ways for people to save their money. Especially for the long term - as the governments of stable countries never fail to honour their debts.





This makes the bonds sought after, and people who have bought them can sell them to other people. Whoever has the bond will get the interest from it, and will have it to cash in when it matures.





Governments sell bonds to their citizens e.g. 'war bonds', savings bonds etc. or to banks, or to big companies, or to other countries.





If bond holders sell their bonds until the market is full of them, the price will drop. The more for sale, the cheaper they would become.





Since the bonds are valued in money the goverment has made, then this would mean that the goverment's money was selling for less than the figure they had printed on it, and the interest left to come. And once some people saw that this was happening, then they would be worth even less... until the $1000 bond was selling for a packet of cigarettes or two supermarket tokens or something.





Dollars which are printed by the US mint, or any other paper currency in the world, are really just the same thing as bonds. They are I.O.U's printed by a government. Countries that want to save money to be able to buy things in the world, buy bonds and currency made by the countries with the strongest steadiest economies, and the most stable political systems.





For many years, the obvious choice has been to buy US bonds, and US currency. So - there is a lot of both in the hands of foreign governments around the world. In fact, nobody knows quite how much, but China has bought lots.





But nobody wants all of that lot to be put on the market at the same time. This would be a 'run on the dollar'.





In fact, the more of these China or anybody else did sell, the less the ones they still held would be worth, as the market price would fall. So if anybody did try to sabotage another nations economy by selling off all its currency holdings, they would be hurting themselves too.





I may be wrong on parts of this, but it is something like that.
Reply:same way as you (or your parents) have credit card debt - you buy stuff you cannot pay for.
Reply:alb_4 pretty much explained it. I will add:





All of the peopel you hear in the media and elsewhere that panic and fear monger about China hurting us by all of this debt dont understand how it works.





Beyond China not being able to just call on a loan, most people dont understand how the debt relationship works with China. The only thing they can do to harm us is to sell all of our bonds that they own. In theory, China could deside to dump all of the debt that they are holding and cause US economic harm, but this would harm them as well and therefore we should not be afraid of this happening. So here is how it works.





China wants to keep this debt imbalance because it uses US debt to keep its currency artificailly low. This makes their exports relatively cheap to the US and other countries so that its exporting industries can do well. How does this work then?





When the Chinese central bank buys our debt, they need dollars to do so. They must then sell yuan (china's currency) and buy dollars. This reduces the demand for yuan at the same time as increaseing the demand for the dollar. This cause the Yuan to be "less expensive" and the dollar to be "more expensive." Its basic supply and demand. By managing this balance, they "peg" their currency to a fixed rate that is lower then it would be if it were allowed to freely trade. (In reality, they take a lot of the money earned from their trade surpluss with us and just dont convert the dollars back into Yuan, but the effect is the same.)





If they decided to sell off or "dump" all of the US debt, as the fear mongerors and anti globalists say, then they would harm themselves in the process. Yes, this would drive up US interest rates as the supply of loanable funds decreases driving the US into recession. However, this would also "unpeg" their currency and cause it to appriciate, as they buy back yuan as they sell dollars. The dollar falls, the yuan rises. This hurts their exporting industries as their goods are now relatively more expensive. While at the same time, a US economic collapse will reduce american consumption demand for their products. Therefore, if they are going to take the US down, they will take themselves down with the US.





Also the reality is that even though it would hurt the US, the american economy is very strong and resiliant and it will be absorbed. A recession would occur, but the whole country won't collapse. The same can't be said about China. Social disorder is something the China government fears, and a massive economic collapes resulting in heavy unemployment would cause unrest. The governemnt may even fall under the most severe case. They wont risk this.





So in conclusion, though it is theoretically possible, China won't be doing this anytime soon. It will harm them too. Our economies are too interdependent. And I am assuming all of those anti-globalization people out there also dont like war. If the US wants to avoid future conflicts with China, then the best way is to keep this interedependence, so that neither nation would benifit from conflict.