As a major holder of U.S. debt, Beijing is frustrated over its lack of leverage over U.S. monetary policy, since as the dollar depreciates, China’s dollar holdings lose value. But according to this editorial from China’s state-controlled Global Times, Beijing still has a card to play. This editorial suggests that unless the U.S. halts arms sales to democratic Taiwan, another issue it considers vital to its interests, it may cut back on future purchases of U.S. Treasury bonds.
The Global Times editorial says in part:
On his visit to China, Joe Biden is confronting a far more assertive Chinese public, which is flexing more influence than ever over government affairs. The public is demanding that the government better utilize its massive foreign exchange reserves. Chinese holdings of $1.1 trillion in U.S. debt translate into nearly 8,000 yuan [$1251] for every Chinese citizen.
At the moment, convincing the Chinese public of America’s capacity to honor its commitments is an uphill battle. The 1982 Taiwan Communiqué serves as a framework for gradually resolving the historic problem of American weapons sales to Taiwan. But in the three decades that followed, the issue has emerged again and again to unsettle bilateral relations.
Within the United States, there is a certain sentiment that China is caught in a ‘dollar trap,’ meaning that it is at the mercy of a depreciating greenback. This is incorrect. While a certain amount of loss on this investment appears inevitable, China still has a card to play. A number of Chinese academics suggest linking China’s continued holding of U.S. debt to other aspects of Sino-U.S. relations – including arms sales to Taiwan.
This is a viable option. The United States should remember that it has the most to gain – or lose – from a stable dollar.
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