Over the years, China has quietly monetized yuan to buy dollars for the express purpose of making their currency cheap. This has helped their economy to maintain a competitive advantage as an export driven growth operation. What does this have to do with treasuries? Well, when a country is a net exporter of goods and services, it naturally becomes a net importer of foreign capital. China, being the largest exporter on the planet, has made the United States it’s largest export destination. This means that China receives dollars-in the form of credit- for their goods.
If China chose to convert those dollars into yuan, effectively selling dollars and buying the domestic currency, the yuan would appreciate. A strong yuan means their exports become more expensive. If their exports become more expensive their trading partners will look elsewhere for their goods and services. Long story short: GDP would fall in China.
So what’s an exporter to do? Well, treasuries are safe assets, maybe even the safest on the map. While the yield next to nothing, and some yield nothing (at least in real terms), they are stable. So if China and the other major net exporters want to keep growing, The United States may have to keep running a current account deficit. How can this be sustainable, one may wonder?
That is a question for those much smarter. It would seem that the world is in short supply of safe assets. This is proven by the prices, and subsequent yields, of those assets. When the prices are bid up so much that the yield is invisible, there is clearly an imbalance. So while America may not be on a sustainable course, the world still begs for more dollars.
As the world’s reserve currency, the US is lucky enough to be a debtor into the unforeseeable future – just to keep world growth afloat. It is safe to say that someone could take our place, but China certainly would not be in position to do that as explained above. Europe has it’s own problems with it’s asynchronous nations and their heterogeneous fiscal preferences all under one roof. And need we say more about Japan than it’s Central Bank is buying Exchange Traded Equity Funds while gobbling up 40% of their government bond market?