After selling American debt several times in a row, China still holds103.9 billion US debt (as of March 2022), but the US debt has exceeded its GDP, and many people are beginning to worry that the United States will lose its solvency and default. What if the United States defaults? You can rest assured after reading the causal benefits.
The source of holding US debt
First of all, let's take a look at how China got a lot of American debt. China's economic growth mainly depends on exports, investment and consumption. Relying on a strong labor market and a complete industrial system, China has become a manufacturing power in the past few decades. Mechanical and electrical products and clothing are widely welcomed overseas because of their high quality and low price, and the total export trade continues to grow.
However, there is a trade surplus in China's import and export trade, that is, the export volume is far greater than the import volume, and the gap of this trade surplus is still expanding, which leads to the accumulation of a large number of dollars in our hands. These dollars can be used as foreign exchange reserves for various international transactions or gold purchases, and can also be used to buy imported products.
However, due to the restrictions on the export of foreign products to China, we can't buy high-tech imported products with US dollars, so the remaining US dollars can't be consumed at home, which means we have to use them for overseas investment and loans. Otherwise, you can only put a lot of dollars there, but once the dollar depreciates rapidly, it is extremely unsafe to put a lot of dollars there.
In this case, buying American debt has become another option. American debt not only has high interest, but also has a good reputation. Since the issuance of American debt, the United States has strictly abided by the promise of paying interest on a monthly basis and repaying the principal at maturity, so countries have a positive attitude towards American debt, and even if they want to sell it, they will be willing to take over. This strong liquidity prompted China to buy a lot of American bonds.
The impact of US default
Although the US debt has a high reputation, it has exceeded the scope of its GDP, which inevitably makes people worry that the United States will have no money to pay its debts in the future. All countries in the world will buy American debt, because the United States uses national credit as a guarantee, so the United States has no record of default. After all, it still wants to promote its own development through the way of "borrowing money-paying off debts-borrowing money".
If the United States really refuses to pay its debts, the accumulated credit in the United States will be greatly discounted and even spurned in the international financial industry. If it wants to gain benefits by issuing US debt in the future, no one may want to. If the situation is very serious, the dollar hegemony system that the United States has worked so hard to establish will also suffer heavy losses, and the position of the dollar in the world currency settlement model will decline rapidly.
In addition, in addition to the country, there are American people, who own most of the American debt. If the United States defaults, the interests of the American people will be affected. It is not a wise choice to solve the debt problem by consuming national credit. Once a country's reputation in the world is questioned, it will lose many partners, and the United States cannot risk losing long-term interests.
What should I do if I don't?
On the other hand, in order to safeguard its own dollar interests, the United States often makes some crazy moves internationally. What if it really finds an excuse not to pay back the money? Did you get the money for nothing when you went to America? In fact, many countries have already prepared. In the face of the possible debt crisis in the United States, major US debt holders are constantly selling their US debt to minimize possible losses.
Russia has continuously sold hundreds of billions of dollars of US debt, leaving only a few billion dollars. After the conflict between Russia and Ukraine, the United States strengthened sanctions against Russia and frozen Russia's foreign exchange reserves, which once again made people question the credit of American debt, and the action of selling American debt was faster. With the rising domestic inflation rate in the United States, economic problems have become particularly obvious.
In order not to get involved in the possible economic crisis in the United States, reducing American debt has become an important means to protect its own interests. Under the influence of various factors, China also continues to sell American debt. In order to better deal with the US default, another measure is "dollarization" to improve the settlement status of RMB in international trade.
It is worth mentioning that the settlement rate of RMB in international trade has obviously improved. In order to get rid of the dollar oil system, China has reached cooperation with many countries to settle oil trade in RMB. Russia has always adhered to its own point of view on the road of "dollarization", claiming that natural gas export trade will be settled in rubles.
Therefore, countries that want to buy Russian natural gas must find ways to convert dollars into rubles and trade them. With the more flexible international trade settlement, the hegemonic position of the US dollar will be disintegrated, and the world wealth can no longer be harvested. If the United States defaults, then no one will be willing to use dollars in international trade.
It can be seen from the actions of countries all over the world to sell American debt one after another that American debt has made people lose some confidence in its credibility. In addition, the freezing of other countries' assets with the help of the United States has also caused a huge crisis in American debt, and it has become the common sense of many countries to move toward dollarization. Therefore, even if the United States defaults in the future, it will not have much impact.
If the United States does not face up to domestic economic problems and continues to print money to solve economic problems, it will fall into a greater economic crisis in the future. When the debt crisis collapses, the hegemonic system established by the United States will also collapse, and it will lose the strength to impose sanctions on other countries through the US dollar. More seriously, the American economy may suffer a major blow or even collapse, and the world monetary system will usher in a major dishwashing, and the new monetary system will no longer be dominated by the US dollar.