Sometimes life imitates art, sometimes the news is hyperrealist, and other times it's more like surrealism. First off, what are China's US Treasury holding? The answer about US$ 1 trillion (a lot but in reality its only about 4% of the total US debt outstanding) so a lot but not that much either. Because the amount of US debt outstanding is so high the impact of selling this debt to third parties will have an impact.
First, the US Government is under no obligation to buy back its debt, but under what consideration would the treasury do so? The US treasury values stability of the US dollar -- it goes up a bit and goes down a bit, but it operates in a range. So the US Treasury may purchase some of its debt to "maintain the value of the US dollar" to do so it will sell other countries treasury bonds( with tons of market effects) and monetize some of these purchases.
What is the impact of China declaring that it wants to sell its US dollar holdings (that's exactly what Treasury bonds are), it will depress the price of the US dollar -- the Chinese Yuan would increase in value (assuming that China is paid in Yuan), of course, this is not possible (Since the Yuan is a controlled currency) so the reality is that China will sell its US dollars for something else -- there are few options; the Euro or the Yen -- that's it.
Neither Europe nor Japan would be happy to see the price of their currency move by 5% to 10% so they would take action -- again the impact on the US would be, so far negligible, however, the value of the US dollar would fall against a basket of currencies.
In a nutshell:
The US dollar would be devalued (let's say 5 to 10%) which would make US export cheaper and imports more expensive -- The Yuan would have to increase in value (eventually they would have to match the reality of the rest of the world -- especially if the BoC is at the center of this movement)
Chinese exports would become more expensive in the US and US imports would become cheaper - hence more competitive.
Europe would also take action (tariffs against Chinese imports???)
At another level, for the US government, the problem would be to fund future treasury spending (since the US government is running a 5% deficit) However, the US government has been printing dollars -- monetizing the debt for the past 2 years. Hence the asset inflation. So the impact of China not being a buyer of US treasuries is a negligible issue, but then China has not been buying US debt for some time already.
So far the USA no pain, Europe, Japan, and China some pain.
The moral of the story is that the only country that benefits from China selling its US treasury holding is the US.
Think about that, now go and read the press! right-wing in particular, you would think that this is a terrible thing for the US (granted it's not great), but still, the people being hurt are not America but everyone else. Another storm in a teacup on a Friday morning.
P.S. it's not the first (or last ) time that China threatened to sell its US treasury holdings
PPS Although China talks bit their currency is protected and managed by the central bank
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