First of all, we need to know what we use to buy American debt. We use foreign exchange reserves to buy American debt, and the main sources of foreign exchange reserves are several aspects: first, dollars earned by trade deficit; Second, dollars brought by foreign investors, third, dollars borrowed by China enterprises from foreign banks, and fourth, some short-term hot money inflows, so foreign exchange reserves are not all our own money.
According to the economic development, the central bank will issue a certain amount of currency in circulation in China, but neither too much nor too little. Too much will lead to inflation, too little will lead to deflation, and moderate inflation is the most reasonable. And if these dollars want to enter China, they have to be converted into RMB for circulation. After the bank receives US dollars, it will convert them into RMB equivalent. Some of the RMB exchanged is extra money. If the quantity is small, the impact may not be great, and if the quantity is large, it will lead to inflation. So the central bank doesn't want it to circulate in the market, so it issues bonds to this bank, also called central bank bills. This process is called write-off, and this part of the money will be recovered.
By the end of June 2020, the balance of China's foreign exchange reserves was $365,438 +0 123 billion. If all these foreign exchange reserves are converted into RMB for domestic investment, it will cause serious inflation, lead to rising prices and asset bubbles, and our deposits will become worthless.
And if all foreign exchange is invested in China, resulting in no foreign exchange reserves in our hands, then how to buy foreign goods and technologies and how to resist financial risks is just like 1997, when Soros tried to copy the XG stock market. If we don't have enough foreign exchange reserves to support it, the consequences will be no different from those in Thailand. Foreign exchange reserves can also maintain the stability of the RMB exchange rate and avoid excessive appreciation and depreciation. Therefore, in this case, it is a self-defeating behavior to invest all the foreign exchange reserves in China.
Why buy American debt?
A country is equivalent to a family with trillions of dollars in foreign exchange reserves. If you can't wait for depreciation in your hand, you can only invest. Buying American debt is a relatively stable investment method at present. If there are other better investment channels and ways, no country will buy American debt to support the development of other countries. Issuing national debt is something that every country will do. A country's fiscal revenue is high, but it will spend more. At present, there are not many countries that can achieve fiscal surplus. National debt is also the most stable financial product at present, because there are countries behind it. Have you ever bought national debt?